MBA(FinTech)

Financial Derivatives (MFT706)

Forwards & Futures

Leben Johnson Mannariat

23rd Jan 2019

Forwards & Futures 1

 • FORWARDS
F=SerT
Where
F = Forward or Future Price today of underlying.
S = Spot
t = Present Time
T = Future Time to delivery
r = Risk free interest rate per annum.
Forward with No Income: F=SerT
If F > SerT Buy Spot, Short Future
If F < SerT Sell Spot, Long Future
Forward with Cash Income: F=(S-I)erT
where I is the present value of cash income coupon (C).
Present value of coupon I = Ce-rT
Forward with Dividend Yield: F=Se(r-q)T
Where q is the dividend yield percentage
Value of Forward Contract: f=(F-K)e(-r)T

Forwards & Futures 2

 • Futures
Future Prices Relationship:
- Future trades on cash market volatility
- Time to expiration & future price volatility
- Trading volumes and future price volatility

BASIS = SPOT – FUTURE

FUTURE = SPOT + COST OF CARRY,

F = S (1 + C)
With Transport costs of carry
F < S (1+T) (1 + C)
Reverse cost of carry
F > S (1-T) (1 + C)

So Future trading boundaries

S (1-T) (1 + C) <= F <= S (1+T) (1 + C)
Impact of different borrowing rates
S (1-T) (1 + CL) <= F <= S (1+T) (1 + CB)

Forwards & Futures 3

 SPREADS:
Spread refers to the relationship between two
different future prices of an asset.
Spreadt, T = F t,T+n - F t,T

Stock Index Future F = Se(r-q)T

where q is the return in the stock dividends within
the index. (convenience yield)

Foreign Currency F = Se(r-rf)T

where rf is the risk free interest on the foreign
currency

Forwards & Futures 4