Microsoft PowerPoint - PoF.ppt

Arbitrage free forward priceƒ 135

Underlying = non-dividend paying security

ƒ

... no arbitrage condition

ƒ

Suppose

Ä

arbitrage strategy

ƒ

t=t0

• Long forward:

0

• Sell security short:

+S

t0

-Invest at

r

:

-S

t0

-Sum:

0

ƒ

t=T

• Fulfill forward:

-F

t0,T

• Receive from investment:

+S

t0

rTe

• Sum = Arbitrage profit:

St0

rTe

-F

t0,T

rT

t

T

t

e

S

F

0

, 0

=

rT

t

T

t

e

S

F

0

, 0

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Derivative securities: Forwards - Pricing