Put Forward Agreement

The “Displaystyle r” is the risk-free return constantly compounded, and T is the time until maturity. The intuition behind this result is that, since you want to own the asset at the time T, there should be no difference in a perfect capital market between buying the asset today and keeping it and buying the futures contract and taking over the delivery. Therefore, both approaches must cost the same cost in terms of present value. For proof of arbitration, why this is the case, see the price rationality below. Case 2: Suppose F t, T < S t r ( T – t) <S_ F_ . Then an investor can do the opposite of what he did above in Case 1. This means that a unit of the asset is sold, that money is invested in a bank account and that a long-term contract is entered into with a price of 0. For an investment that does not offer income, the relationship between the current forwards – F 0 `displaystyle F_{0}) and spot (S 0 `displaystyle S_{0}`) price is the price formula above can also be written as: Unlike standard futures contracts, a futures contract can be adjusted to a product, amount and delivery date. The raw materials traded can be cereals, precious metals, natural gas, oil or even poultry. Futures contracts can be settled on a cash or delivery basis. A advance rate agreement (FRA) is ideal for an investor or company that…

If you look at the example above, you now assume that the initial price of Andy`s house is $100,000 and that Bob enters into a contract in advance to buy the house for a year from today. But since Andy knows he can sell for $100,000 and put the product in the bank, he wants to be compensated for the late sale. Suppose the risk-free R (bank interest rate) for one year is 4%. The bank`s money would reach $104,000 risk-free. So Andy wants the contract to be worth at least $104,000 in a year – opportunity costs are covered. A call option offers the right, but not the obligation to buy or sell a security. A futures contract is an obligation, that is, there is no choice. Call options can be purchased on different securities, such as stocks and bonds, as well as commodities.