Microsoft PowerPoint - PoF.ppt

Arbitrage free forward priceƒ 136

Suppose

Ä

arbitrage strategy

ƒ

t=t0

• Short forward:

0

-Buy security:

-S

t0

-Credit at

r

:

+S

t0

-Sum:

0

ƒ

t=T

• Fulfill forward:

+F

t0,T

• Credit repayment:

-S

et0

rT

• Sum = Arbitrage profit:

Ft0,T

-S

t0

rTe

rT

t

T

t

e

S

F

0

, 0

>

Derivative securities: Forwards - Pricing