| There are two basic concepts in finance: time-value of money and uncertainty about expectations. |
Í grunninn eru tvö meginhugtök í fjármálum: tímavirði peninga og óvissa um væntingar. |
| The two concepts are the core of financial valuations, including futures contracts. |
Meginhugtökin eru kjarninn í fjármálamati, þar með taldir framvirkir samningar. |
| cost-of-carry model is the most widely accepted and used for pricing futures contract |
oftast er notað stöðukostnaðarlíkanið við verðlagningu framvirkra samninga |
| Cost-of-carry Model |
Stöðukostnaðarlíkanið |
| Cost-of-carry model is an arbitrage-free pricing model. |
Þýðingar fyrir ofan duga sem dæmi. |
| Its central theme is that futures contract is so priced as to preclude arbitrage profit. |
Þýðingar fyrir ofan duga sem dæmi. |
| In other words, investors will be indifferent to spot and futures market to execute their buying and selling of underlying asset because the prices they obtain are effectively the same. |
Þýðingar fyrir ofan duga sem dæmi. |
| Expectations do influence the price, but they influence the spot price and, through it, the futures price. |
Þýðingar fyrir ofan duga sem dæmi. |
| They do not directly influence the futures price. |
Þýðingar fyrir ofan duga sem dæmi. |
| According to the cost-of-carry model, the futures price is given by Futures price(Fp) = Spot Price(Sp) + Carry Cost(Cc) - Carry Return(Cr) (1) |
Þýðingar fyrir ofan duga sem dæmi. |
| Carry cost (CC) is the interest cost of holding the underlying asset (purchased in spot market) until the maturity of futures contract. |
Þýðingar fyrir ofan duga sem dæmi. |
| Carry return (CR) is the income (e.g., dividend) derived from underlying asset during holding period. |
Þýðingar fyrir ofan duga sem dæmi. |
| Thus, the futures price (F) should be equal to spot price (S) plus carry cost minus carry return. |
Þýðingar fyrir ofan duga sem dæmi. |
| If it is otherwise, there will be arbitrage opportunities as follows |
Þýðingar fyrir ofan duga sem dæmi. |
| When F > (S + CC - CR): Sell the (overpriced) futures contract, buy the underlying asset in spot market and carry it until the maturity of futures contract. |
Þýðingar fyrir ofan duga sem dæmi. |
| This is called "cash-and-carry" arbitrage. |
Þýðingar fyrir ofan duga sem dæmi. |
| When F < (S + CC - CR): Buy the (under priced) futures contract, short-sell the underlying asset in spot market and invest the proceeds of short-sale until the maturity of futures contract. |
Þýðingar fyrir ofan duga sem dæmi. |
| This is called "reverse cash-and-carry" arbitrage. |
Þýðingar fyrir ofan duga sem dæmi. |
