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Asset Pricing in Discrete TimeA Complete Markets Approach$
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Ser-Huang Poon and Richard Stapleton

Print publication date: 2005

Print ISBN-13: 9780199271443

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199271445.001.0001

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FORWARD AND FUTURES PRICES OF CONTINGENT CLAIMS

FORWARD AND FUTURES PRICES OF CONTINGENT CLAIMS

Chapter:
(p.97) 6 FORWARD AND FUTURES PRICES OF CONTINGENT CLAIMS
Source:
Asset Pricing in Discrete Time
Author(s):

Ser-Huang Poon (Contributor Webpage)

Richard Stapleton (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199271445.003.0006

‘Forward and Futures Prices of Contingent Claims’ applies the multi-period rational expectations model to analyse the pricing of forward and futures contracts and derives an expression for the difference between the prices of the two, which is commonly known as the convexity adjustment. These are illustrated using an example where the asset price, the pricing kernel and the bond prices are joint lognormal variables. The authors then consider the futures and forward prices of contingent claims, such as call options. Futures prices of options can be significantly different from the forward prices of the contingent claims, especially when the options are on interest-rate related assets such as bonds or swaps. Forward prices of long-term bond can be obtained by taking appropriate expected values of future spot pries under the risk-neutral measure.

Keywords:   convexity adjustment, forward prices of the contingent claims, futures prices of options, interest-rate options, multi-period rational expectations

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