FIN 3506 Lecture Notes - Lecture 5: Risk-Free Interest Rate, Arbitrage, Cash Flow

• School: Temple University
• Department: Finance
• Course: FIN 3506
• Professor: Bruce B.Rader

Document Summary

Asset that are pieces of paper that represent claims that are held by a significant number of investors. Examples: stocks bonds mutual funds etc: consumption assets. Short selling and asset: financial without interim cash flows. The basic concept in the valuation of futures or forward contracts is the concept of no arbitrage pricing. The basic model is generally called the cost of carry model. The other side of this argument is called the reverse cost of carry model (although this model is hinted at but not covered in the text of the hull book) The first type of commodity that we will address is the investment commodity such as a bond or stock. Let us assume that there is a forward contract on zero coupon bonds. The current price of a 6-month forward contract is trading at . A bond that can be delivered against the forward contract is trading at .