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Future Pricing

Future Pricing

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Published by kurt09

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Published by: kurt09 on Jan 10, 2010
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11/05/2011

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Future pricing
ByDr. Surya Dev
 
Markets are perfect i.e there are no transaction cost, nocommissions or bid-ask spreads.There are no taxes.Market participants can buy or sell goods without affecting prices.There are no impediments to short selling.There is no default risk. Each of the two parties to everytransaction knows that counterparty will perform ascontractually required.All individuals are wealth maximisers.Market participants have an unlimited ability to borrow andlend money at the rate r.Commodities can be stored indefinitely without any change intheir features such as quality
Cost of Carry model
Assumptions
 
Basic Cost of Carry ModelF = S + CC - CR 
WhereF=theoretical Forward or future priceS= Spot priceCC= Carrying costsCR= Carry return

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