Financial Modelling 2557A/B Lecture 9: Chapter 5 Lecture Part 2

2 Pages
Unlock Document

Western University
Financial Modelling
Financial Modelling 2557A/B
Xiaoming Liu

In practice, an arbitrageur has additional costs: 1. Trading fees/commissions 2. Bid-ask spreads 3. Different borrowing/lending rates 4. Possible price changes Assumptions: 1. Stock and forward have bid and ask prices 2. Interest rate for borrowing and lending are rB > rL 3. Cost of k for each transaction 4. Stock pays no dividends 5. No transaction costs at T No-Arbitrage bounds: Futures Contracts Forward Contracts Exchange Traded OTC Settled daily through market-to-market which triggers Settled at expiration interim cash payment Standardized terms - delivery dates, locations, Terms can be customized quantities Exchange clearing house is counterparty for each Counterparties are linked through a clearing member specific forward contract Highly liquid Less liquid  There are price limits on futures prices  There are position limits for spectators Margin: The deposit the broker requires with futures Margin Account: The account where the margin goes into Initial Margin: The amount first deposited Marking-to-market: At the end of of each day, the margin account is adjusted to reflect the gain/loss  If investor does not provide extra funds by specified date, broker closes out position  Investor can withdraw any funds in the margin account in excess of the initial margin Maintenance Margin: The minimum level of funds required in the margin of accou
More Less

Related notes for Financial Modelling 2557A/B

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.