Assume the existence of a financial asset whose current (spot) price is St. This asset pays...
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Assume the existence of a financial asset whose current (spot) price is St. This asset pays no dividends. A forward contract on this asset exists, with expiration at date T. The price of this forward contract today is Ft. The price of the spot asset (and therefore the forward contract) at expiration can be written as ST. (a) If I "buy" one forward contract today, what is the payoff on the forward contract at date T? (b) Write down the discounted value of the components of the payoff in part a. Set this discounted value equal to the amount of money which changes hands at the purchase of a forward contract, and solve for the forward price. (c) Examine your answer to part b. Is there any relation between dis- counted cash flow analysis and derivative pricing? Assume the existence of a financial asset whose current (spot) price is St. This asset pays no dividends. A forward contract on this asset exists, with expiration at date T. The price of this forward contract today is Ft. The price of the spot asset (and therefore the forward contract) at expiration can be written as ST. (a) If I "buy" one forward contract today, what is the payoff on the forward contract at date T? (b) Write down the discounted value of the components of the payoff in part a. Set this discounted value equal to the amount of money which changes hands at the purchase of a forward contract, and solve for the forward price. (c) Examine your answer to part b. Is there any relation between dis- counted cash flow analysis and derivative pricing?
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a The payoff on the forward contract at date T depends on the spot price at expiration ST and the fo... View the full answer
Related Book For
Advanced Accounting
ISBN: 9781260247824
14th Edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Posted Date:
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