Professional Documents
Culture Documents
AND FUTURES
Session 4
GROUP PROJECTS
▷ BUSINESS OF THE ENTITY
1 INVESTMENT ASSETS
EQUITY/BONDS/FC/GOLD/SILVER
2 CONSUMPTION ASSETS
COPPER/ OIL/WHEAT/CORN
SHORT SELLING
▷ SELLING AN ASSET NOT OWNED
▷ OTC
▷ EXCHANGE TRADED
▷ GAINS OR LOSSES ARE SETTLED DAILY
▷ UPFRONT MARGIN
▷ NO COUNTERPARTY RISK AS CLEARING
CORPORATION PROVIDES GUARANTEE
COMPARISON OF FUTURE/FORWARD
FUTURES FORWARDS
REGULATED UNREGULATED
F(0) = S(0)(1+r)^T
▷
▷ PORTFOLIO B
LONG STOCK AND SHORT BONDS
TWO DATES
THREE SECURITIES
CONTRACT ENDS ON DELIVERY CASH SETTLED
BORROW OR LEND FUNDS AT RISK FREE RATE WHATEVER
MODEL ASSUMPTIONS
1. NO MARKET FRICTIONS
5. NO ARBITRAGE OPPORTUNITIES
VALUATION WITH BONDS
DATE PORTFOLIO A PORTFOLIO B
LONG FORWARD LONG STOCK AND SHORT
BOND
0 -S(0)+ F(0)/(1+r)^T
0 = - S(0)+F(0)/(1+r)^T
VALUATION WITH BONDS
DATE PORTFOLIO A PORTFOLIO B
LONG FORWARD LONG STOCK AND SHORT
BOND
0 = - S(0)+F(0)/(1+r)^T
ARBITRAGE WORLD
ARBITRAGE MODEL
▷
▷
SCE 1 F(0) >
SCE 3 F(0) =
SITUATION
Spot Price of a stock A is Rs. 100
Risk free Interest rate, Zero coupon bond yield 6%
Contract is Annual
Transactions costs are Rs. 0.05%
Statutory levies like STT etc. NIL
PV OF COUPON 39.60
PV OF COUPON 39.60
F(0) = (900-39.60)
= 886.603
ASSETS WITH KNOWN YIELDS
1 INTEREST YIELDING BONDS
BOND YIELD
STOCK INDEX YIELD (DIVIDEND YIELD)
EXAMPLE 5.6
▷
CONSIDER A 6 MONTH CONTRACT ON AN ASSET THAT
IS EXPECTED TO PROVIDE INCOME EQUAL TO 2% OF
THE ASSET PRICE DURING A 6 MONTH PERIOD. RISK
FREE RATE r is 10% AND ASSET PRICE Rs. 250 AND 4%
SEMI ANNUAL RATE IS 0.0396 CONTINUOUS
COMPOUNDING
0 0 0
▷
f = (F(0)-K)
CONTRACT KNOWN INCOME
▷
YES
NO
MAYBE
RELATION
BETWEEN FUTURE AND SPOT PRICES IS COST OF
CARRY
STOCK = r
INCOME = r–d
COMMODITY = r – q + u