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Forward and Futures Contracts

  • Futures Contracts: Agreement to buy or sell an asset for a certain price at a certain time. A futures contract is traded on an exchange
  • Forward Contracts : Forward contracts are similar to futures except that they trade in the over-the-counter market
  • Notation for Valuing Futures and Forward Contracts
    • S0: Spot price of the asset underlying today
    • F0: Futures or forward price today
    • T: Time until delivery date ( in years)
    • R: Risk-free interest rate per annum, expressed in continuous compounding, for maturity T
    • Payoff of forwards and futures:



In both Forward and Futures contracts there is an obligation to buy or sell an asset.

Options (to be covered in detail in later slides)

  • Traded both on exchanges and over the counter markets
  • Call option gives the holder the right to buy the underlying asset by a specified time at a certain price
  • Put option gives the holder a right to sell the underlying asset by a specified time at a certain price
  • European options can be exercised on the specified date only, unlike American options which can be exercised anytime up to the expiration date
  • One option contract is to buy/sell 100 shares in the US

No obligation to exercise the right.






To be covered in detail in next session.



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