Pricing futures

Type :

Indian project

Pages :

61 pages

Format :

.doc

Published date :

04/07/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

Introduction
The cost of carry model
Pricing equity index futures
Pricing index futures given expected dividend yield
Pricing stock futures
Using index futures
1. Long security, short Nifty futures
2. Short security, long Nifty futures
3. Have portfolio, short Nifty futures
4. Have funds, long Nifty futures
F&O market watch: Spread trading
Using futures on individual securities
Difference between trading securities and trading futures on individual securities
Introduction to the Blackâ€"Scholes formulae
1. The Blackâ€"Scholes option pricing formulae
Combination positions using stock futures and stock options
Early exercise of American options
Conclusion

Abstract

Stock index futures began trading on NSE on the 12th June 2000. Stock futures were launched on 9th November 2001. The volumes and open interest on this market has been steadily growing. Looking at the futures prices on NSE's market, have you ever felt the need to know whether the quoted prices are a true reflection of the price of the underlying index/stock? Have you wondered whether you could make risk-less profits by arbitraging between the underlying and futures markets? If so, you need to know the cost-of-carry to understand the dynamics of pricing that constitute the estimation of fair value of futures. A futures contract on the stock market index gives its owner the right and obligation to buy or sell the portfolio of stocks characterized by the index. Stock index futures are cash settled; there is no delivery of the underlying stocks. In their short history of trading, index futures have had a great impact on the world's securities markets. Indeed, index futures trading has been accused of making the world's stock markets more volatile than ever before. The critics claim that individual investors have been driven out to the equity markets because the actions of institutional traders in both the spot and futures markets cause stock values to gyrate with no links to their fundamental values. Whether stock index futures trading is a blessing or a curse is debatable. It is certainly true, however, that its existence has revolutionized the art and science of institutional equity portfolio management.