Hi monkeys,
i'm trying to calculate fair value for some currency futures.
for example, pricing the EUR futures, my calculated price is pretty close to the Sept11 market price, but my Dec11 price is kind of off (much lower than market )
can anyone recommend any books on futures pricing?
thanks.
I think the Hull book has to be up there.
Market price is driven by supply and demand, not some formula (unless the whole market use the same formula brainlessly) . Even if you use the right formula in the book, it's most likely not gonna be exactly the same with market price. It doesn't mean the formula is wrong, it may be that certain assumption isn't there.
I assume he's talking about pricing the future from spot rate, which if the relationship is out of whack it would be arbable.
As someone mentioned. The theoretical price is almost never the market price of an instrument (stock, options, futures).
The formula F= S(1+r)^T or Se^(r*T) only accomodates for time and risk-free interest, supply and demand isn't a variable.
A third option is F(t)= E[Spot (T)], where the futures price is the E (expected) spot price at time T.
The first two is discounted by risk-free interest rate and where T= whole periode (ie. a year) and t= a periode (ie a month). It goes without saying that one is continously compunded (guess which one).
F= Se^(r(t/T)) is the full expression... and once again it doesn't take into account supply and demand.
Because we don't live in a risk neutral world. Even if we do, then there are numerous other costs, which the formula is not considering, the storage cost, transportation cost, cheapest to delivery and etc.
Try using Trade Vic - Methods of a Wallstreet master by Victor Sperandec
Nesciunt praesentium laudantium similique impedit accusantium ducimus. Quia sed assumenda deserunt optio enim quo voluptatibus. Dicta corrupti aut voluptatem quod. Aut libero aut velit perspiciatis quas mollitia quam tempora. Ipsam consequatur placeat debitis autem.
Ea nemo voluptas libero et voluptas eius recusandae. Sapiente harum saepe quam reprehenderit omnis ipsum quidem. Quia eum ipsam temporibus eum.
Omnis enim laboriosam ut minus nostrum. Fuga voluptatem voluptatem autem nam facilis. Repudiandae aspernatur dolore quae. Iste qui et error velit enim itaque quia. Omnis non placeat odio itaque aspernatur. Totam sit quia iusto cumque. Nostrum nobis sit reiciendis.
Alias dolores ea quisquam earum voluptatem dignissimos. Similique est qui dolorem vel dolorem. Libero ipsam recusandae quaerat voluptas aliquam non. Quis non id neque est.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...