What This Document Is
This document represents a chapter excerpt from “Fundamentals of Futures and Options Markets, 8th Edition” by John C. Hull, specifically focusing on the determination of forward and futures prices. It’s a detailed exploration of the theoretical underpinnings of pricing these derivative instruments, geared towards students of financial markets. The material originates from a Spring 15 course at the University of Illinois at Urbana-Champaign (FIN 412).
Why This Document Matters
This resource is invaluable for students enrolled in options and futures markets courses, or those preparing for related professional certifications. It’s particularly useful when you’re seeking a deeper understanding of the relationships between spot prices, interest rates, and the pricing of forward and futures contracts. This material will be most helpful when you are studying core valuation principles and arbitrage strategies, and need a robust academic foundation.
Topics Covered
* The distinction between investment and consumption assets in the context of derivative pricing.
* Notation and formulas used in valuing futures and forward contracts.
* The impact of continuous compounding on forward and futures price calculations.
* The relationship between forward and futures prices under varying interest rate conditions.
* Pricing of futures contracts on stock indexes, considering dividend yields.
* Arbitrage opportunities in index markets and the role of computer-assisted trading.
* Application of these principles to currency markets and foreign exchange rates.
What This Document Provides
* Definitions of key terms like short selling and investment assets.
* Mathematical representations for calculating forward and futures prices under different assumptions.
* Conceptual frameworks for understanding the factors influencing price discrepancies between forward and futures contracts.
* An introduction to index arbitrage strategies and their practical implementation.
* A foundation for analyzing futures and forward pricing in currency markets.
