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PRICING FINANCIAL FUTURES CONTRACTS: AN INTRODUCTION

PRICING FINANCIAL FUTURES CONTRACTS: AN INTRODUCTION Footnotes 1 . Because of the large transactions costs involved in delivering all of the stocks in the index in exactly the right proportions, stock index futures actually use cash settlement rather than physical delivery. If the index is above the futures price at maturity, the buyer receives the difference from the seller. If the index is below the futures price, the seller receives the difference. Cash settlement is equivalent to having the seller “deliver” the maturity value of the index, and having the buyer pay the futures price. 2 . Note that 5% is not an annualized interest rate. An investor who deposits $1.00 in the bank in March receives $1.05 in September. 3 . Again, 7% is not an annualized interest rate. An investor who puts $1.00 in nine month bills in March receives $107 in December, Treasury bill spot and futures prices are quoted on an annualized discount basis. For example, suppose the actual price on a 90 day bill is $98.00 (per $100.00 face value). The annualized discount is ($100.00–98.00) × 360/90 =$8.00, and the quoted price is $100.00–8.00 =$92.00. The annualized discount complicates the relation between the quoted spot and futures prices, so http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

PRICING FINANCIAL FUTURES CONTRACTS: AN INTRODUCTION

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References (3)

Publisher
Wiley
Copyright
Copyright © 1989 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/j.1745-6622.1989.tb00174.x
Publisher site
See Article on Publisher Site

Abstract

Footnotes 1 . Because of the large transactions costs involved in delivering all of the stocks in the index in exactly the right proportions, stock index futures actually use cash settlement rather than physical delivery. If the index is above the futures price at maturity, the buyer receives the difference from the seller. If the index is below the futures price, the seller receives the difference. Cash settlement is equivalent to having the seller “deliver” the maturity value of the index, and having the buyer pay the futures price. 2 . Note that 5% is not an annualized interest rate. An investor who deposits $1.00 in the bank in March receives $1.05 in September. 3 . Again, 7% is not an annualized interest rate. An investor who puts $1.00 in nine month bills in March receives $107 in December, Treasury bill spot and futures prices are quoted on an annualized discount basis. For example, suppose the actual price on a 90 day bill is $98.00 (per $100.00 face value). The annualized discount is ($100.00–98.00) × 360/90 =$8.00, and the quoted price is $100.00–8.00 =$92.00. The annualized discount complicates the relation between the quoted spot and futures prices, so

Journal

Journal of Applied Corporate FinanceWiley

Published: Jan 1, 1989

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