4.1 Derivative instruments - forwards and futures

This paper covers:

·        What are forwards and why are they needed?

·        Valuing the forward – risk-neutral valuation

·        A fallacy stemming from the idea of arbitrage-free pricing

·        A replicating strategy

·        The relationship between forward prices and futures prices

·        Rolling-over forwards

·        Dividend/interest-paying assets

·        Investing using forwards and the 'excess return'

·        The forward curve

·        Convenience yields and the cost of carry

·        Contango and normal backwardation

·        Storable commodities with ample inventories

·        Non-storable commodities

·        Storable commodities with modest inventories

·        An FX example and the covered interest parity condition

·        The relationship between forward prices and expected future prices

·        The uncovered interest parity condition

·        Real world evidence in FX

·        The relationship between forward interest rates and expected future interest rates

·        The appendix: building a forward equity curve in practice

The paper has 32 pages