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Forward Contracts (forward + contract)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

On the exit value of a forward contract

THE JOURNAL OF FUTURES MARKETS, Issue 2 2009
Gabriel J. Power
Default risk associated with forward contracts can be substantial, yet these financial instruments are widely used to hedge price risk. An objectively priced exit option on the forward contract would help reduce the likelihood of litigation associated with contract default. A method is proposed to compute the exit option's value for an arbitrary forward contract, using Black's (1976) model and option premium data. The time series dynamics of the exit option value are confirmed to be, like its underlying, well described by a martingale with heavy-tailed (Student) GARCH residuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29: 179,196, 2009 [source]

Stock Options and the Corporate Demand for Insurance

JOURNAL OF RISK AND INSURANCE, Issue 2 2006
Li-Ming Han
This article shows that a corporate manager compensated in stock options makes corporate decisions to maximize stock option value. Overinvestment is a consequence if risk increases with investment. Facing the choice of hedging corporate risk with forward contracts on a stock market index fund and insuring pure risks the manager will choose the latter. Hedging with forwards reduces weight in both tails of corporate payoff distribution and thus reduces option value. Insuring pure risks reduces the weight in the left tail where the options are out-of-the-money and increases the weight in the right tail where the options are in-the-money; the effect is an increase in the option value. Insurance reduces the overinvestment problem but no level of insurance coverage can reduce investment to that which maximizes the shareholder value. [source]

The Impact of Collateralization on Swap Rates

THE JOURNAL OF FINANCE, Issue 1 2007
MICHAEL JOHANNES
ABSTRACT Interest rate swap pricing theory traditionally views swaps as a portfolio of forward contracts with net swap payments discounted at LIBOR rates. In practice, the use of marking-to-market and collateralization questions this view as they introduce intermediate cash flows and alter credit characteristics. We provide a swap valuation theory under marking-to-market and costly collateral and examine the theory's empirical implications. We find evidence consistent with costly collateral using two different approaches; the first uses single-factor models and Eurodollar futures prices, and the second uses a formal term structure model and Treasury/swap data. [source]

On the exit value of a forward contract

THE JOURNAL OF FUTURES MARKETS, Issue 2 2009
Gabriel J. Power
Default risk associated with forward contracts can be substantial, yet these financial instruments are widely used to hedge price risk. An objectively priced exit option on the forward contract would help reduce the likelihood of litigation associated with contract default. A method is proposed to compute the exit option's value for an arbitrary forward contract, using Black's (1976) model and option premium data. The time series dynamics of the exit option value are confirmed to be, like its underlying, well described by a martingale with heavy-tailed (Student) GARCH residuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29: 179,196, 2009 [source]

Hedging under counterparty credit uncertainty

THE JOURNAL OF FUTURES MARKETS, Issue 3 2008
Olivier Mahul
This study investigates optimal production and hedging decisions for firms facing price risk that can be hedged with vulnerable contracts, i.e., exposed to nonhedgeable endogenous counterparty credit risk. When vulnerable forward contracts are the only hedging instruments available, the firm's optimal level of production is lower than without credit risk. Under plausible conditions on the stochastic dependence between the commodity price and the counterparty's assets, the firm does not sell its entire production on the vulnerable forward market. When options on forward contracts are also available, the optimal hedging strategy requires a long put position. This provides a new rationale for the hedging role of options in the over-the-counter markets exposed to counterparty credit risk. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28: 248,263, 2008 [source]

Pricing of Forward and Futures Contracts

JOURNAL OF ECONOMIC SURVEYS, Issue 2 2000
Ying-Foon Chow
There has long been substantial interest in understanding the relative pricing of forward and futures contracts. This has led to the development of two standard theories of forward and futures pricing, namely, the Cost-of-Carry and the Risk Premium (or Unbiased Expectations) hypotheses. These studies have modelled the relationship between spot and forward/futures prices either through a no-arbitrage condition or a general equilibrium setting. Relatively few studies in this area have considered the impact of stochastic trends in the data. With the emergence of non-stationarity and cointegration in recent years, more sophisticated models of futures/forward prices have been specified. This paper surveys the significant contributions made to the literature on the pricing of forward/futures contracts, and examines recent empirical studies pertaining to the estimation and testing of univariate and systems models of futures pricing. [source]