What are forward contracts?
What does long and short generally mean?
Agreement to buy or sell an asset at a certain future time for a certain price
Long: Investor has paid in full for asset & owns them
Short: Investor has sold shares w/o owning them yet or sold an option
How is the forward contract payoff calculated?
= Difference between spot price and strike price.
What is arbitrage?
A transaction involving no negative cashflow at any state & time, and a positive cashflow at at least one state & time due to two or more securities being mispriced relative to eachother
How to realize arbitrage with forwards?
Assumption: price of contract = zero
Fair price:
What is the value of a forward contract?
The compounded (discounted?) difference betweeen the forward price (F_0) and the strike price (K)
Last changed2 years ago
