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FRM-1 Study Notes

Forward and Futures Contracts

  • Futures Contracts: Agreement to buy or sell an asset for a certain price at a certain time. A futures contract is traded on an exchange
  • Forward Contracts : Forward contracts are similar to futures except that they trade in the over-the-counter market
  • Notation for Valuing Futures and Forward Contracts
    • S0: Spot price of the asset underlying today
    • F0: Futures or forward price today
    • T: Time until delivery date ( in years)
    • R: Risk-free interest rate per annum, expressed in continuous compounding, for maturity T
    • Payoff of forwards and futures:

In both Forward and Futures contracts there is an obligation to buy or sell an asset


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