Chapter 5 Determination of Forward and Futures Prices

In this chapter we examine how forward prices and futures prices are related to the spot price of the underlying asset. Forward contracts are easier to analyze than futures contracts because there is no daily settlement—only a single payment at maturity. We therefore start this chapter by considering the relationship between the forward price and the spot price. Luckily it can be shown that the forward price and futures price of an asset are usually very close when the maturities of the two contracts are the same. This is convenient because it means that results obtained for forwards are usually also true for futures.

In the first part of the chapter we derive some important general results ...

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