Futures Contracts

Futures Contracts

1. Definition: a contract for one party to buy an underlying instrument (e.g. Gold) from another partiy at a later date, at a price agreed upon today

2. Pricing Futures

   • Important Concepts
     • Investment vs Consumption assets
       • Investment Assets
         • assets held purely or mostly for investment purposes
         • examples: shares, bonds, gold
         • dont have to be held exclusively for investment
       • Consumption Assets
         • assets held primarily for consumption
         • examples: copper, lead, oild, grains, etc
       • Distinction important because arbitrage arguments can be used to determine the forward prices of investment assets but not always for consumption assets
     • How futures and forward prices are related to spot prices
     • The roles of the following in pricing futures
       • 'risk free rate'
       • 'income from underlying assets
       • Storage costs
       • Convenience yield

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