Week4Chapter5学习课件.pptVIP

FINA0301 DerivativesFaculty of Business and Economics University of Hong Kong Dr. Tao Lin Outline Financial futures and forwards On stocks and indexes On currencies (Chapter 6, 6.1*) On interest rates (Chapter 6, 6.2*) How are they used? How are they priced? How are they hedged? *: these two sections in “Fundamentals of Derivatives Markets” are included in chapter 5 of “Derivatives markets”. Alternative Ways to Buy a Stock Four different payment and receipt timing combinations Outright purchase: ordinary transaction Fully leveraged purchase: investor borrows the full amount Prepaid forward contract: pay today, receive the share later Forward contract: agree on price now, pay/receive later Alternative Ways to Buy a Stock Payments, receipts, and their timing Pricing Prepaid Forwards If we can price the prepaid forward (FP), then we can calculate the price for a forward contract F = future value of FP Three possible methods to price prepaid forwards Pricing by analogy Pricing by discounted present value Pricing by arbitrage For now, assume that there are no dividends Pricing Prepaid Forwards (cont’d) Pricing by analogy In the absence of dividends, the timing of delivery is irrelevant Price of the prepaid forward contract is the same as current stock price Analogy (replica of prepaid forwards): the asset is bought at t = 0, delivered at t = T. Pricing Prepaid Forwards (cont’d) Pricing by discounted preset value (a: risk-adjusted discount rate) If expected time T stock price is E0(ST), then Since expected value of the stock at time T is Combining the two, Pricing Prepaid Forwards (cont’d) Pricing by arbitrage Arbitrage: a situation in which one can generate positive cash flow by simultaneously buying and selling related assets, with no net investment and with no risk ? free money!!! If at time t = 0, the prepaid forward price somehow exceeded the stock price, i.e., an arbitrageur could: buy stock and sell prepaid forward Pricing Prepaid Forwards (co