Introduction
We will cover following topics
Overview
Welcome to the module on “Pricing Forwards and Futures.” In this module, we will delve into the intricacies of pricing and valuing forward and futures contracts. These financial instruments play a pivotal role in risk management, speculation, and hedging strategies for various assets and markets. Understanding how to calculate prices, values, and the relationships between these contracts is essential for anyone involved in finance, investing, or trading.
Purpose and Scope of the Module
The primary purpose of this module is to provide you with a comprehensive understanding of how forward and futures contracts are priced and valued. By the end of this module, you will be equipped with the knowledge and tools necessary to calculate prices, understand arbitrage opportunities, and evaluate the relationships between forward and spot prices. Whether you are a financial analyst, investor, or simply curious about the mechanics of these contracts, this module will give you valuable insights into the world of derivatives trading.
Objectives of the Module
Throughout this module, we will cover a range of learning objectives designed to enhance your understanding of pricing forwards and futures. These objectives include:
1) Defining and describing financial assets, which form the foundation of derivative contracts.
2) Exploring short-selling and calculating net profits from short sales, particularly with dividend-paying stocks.
3) Describing the differences between forward and futures contracts, along with the relationship between forward and spot prices.
4) Calculating forward prices using underlying asset spot prices and understanding arbitrage opportunities between spot and forward prices.
5) Distinguishing between the forward price and the value of a forward contract.
6) Calculating the value of forward contracts for financial assets with or without income or yield.
7) Explaining the relationship between forward and futures prices and its implications.
8) Calculating the value of stock index futures contracts and comprehending the concept of index arbitrage.
Conclusion
As we embark on this journey through the intricacies of pricing forwards and futures, keep in mind that these concepts are integral to the functioning of modern financial markets. Whether you are a novice or an experienced professional, this module will provide you with a solid foundation to grasp the nuances of these derivative contracts. Let’s dive in and explore the world of pricing forwards and futures.