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Pricing of Forward and Futures Contracts

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  • Chow, Ying-Foon
  • McAleer, Michael
  • Sequeira, John M

Abstract

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 z the estimation and testing of univariate and systems models of futures pricing. Copyright 2000 by Blackwell Publishers Ltd

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 14 (2000)
Issue (Month): 2 (April)
Pages: 215-53

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Handle: RePEc:bla:jecsur:v:14:y:2000:i:2:p:215-53

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Cited by:
  1. Roengchai Tansuchat & Chia-Lin Chang & Michael McAleer, 2010. "Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH," CIRJE F-Series CIRJE-F-704, CIRJE, Faculty of Economics, University of Tokyo.
  2. Clinton Watkins & Michael McAleer, 2006. "Pricing of non-ferrous metals futures on the London Metal Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 853-880.
  3. Huang, Bwo-Nung & Yang, C.W. & Hwang, M.J., 2009. "The dynamics of a nonlinear relationship between crude oil spot and futures prices: A multivariate threshold regression approach," Energy Economics, Elsevier, vol. 31(1), pages 91-98, January.
  4. Adam-Müller, Axel F.A. & Nolte, Ingmar, 2011. "Cross hedging under multiplicative basis risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2956-2964, November.
  5. Chris D'Souza, 2002. "How Do Canadian Banks That Deal in Foreign Exchange Hedge Their Exposure to Risk?," Working Papers 02-34, Bank of Canada.

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