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On the Term Structure of Futures and Forward Prices

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Author Info

  • Björk, Tomas

    ()
    (Department of Finance)

  • Landen, Camilla

    ()
    (Department of Mathematics)

Abstract

We investigate the term structure of forward and futures prices for models where the price processes are allowed to be driven by a general marked point process as well as by a multidimensional Wiener process. Within an infinite dimensional HJM-type model for futures and forwards we study the properties of futures and forward convenience yield rates. For finite dimensional factor models, we develop a theory of affine term structures, which is shown to include almost all previously known models. We also derive two general pricing formulas for futures options. Finally we present an easily applicable sufficient condition for the possibility of fitting a finite dimensional futures price model to an arbitrary initial futures price curve, by introducing a time dependent function in the drift term.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0417.

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Length: 40 pages
Date of creation: 08 Dec 2000
Date of revision: 20 Dec 2000
Publication status: Published in Mathematical Finance - Bachelier Congress 2000, Geman, Helyette, Madan, Dilip, Pliska, Stanley, Vorst, Ton (eds.), 2002, pages 111-150, Springer Verlag.
Handle: RePEc:hhs:hastef:0417

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Web page: http://www.hhs.se/
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Related research

Keywords: term structure; futures price; forward price; options; jump-diffusion model; affine term structure;

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References

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  1. Miltersen, Kristian R. & Schwartz, Eduardo S., 1998. "Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 33-59, March.
  2. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  5. Tomas Björk & Yuri Kabanov & Wolfgang Runggaldier, 1997. "Bond Market Structure in the Presence of Marked Point Processes," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 211-239.
  6. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  7. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
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Citations

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Cited by:
  1. Abdullah Almansour & Margaret Insley, 2013. "The impact of stochastic extraction cost on the value of an exhaustible resource: An application to the Alberta oil sands," Working Papers 1303, University of Waterloo, Department of Economics, revised Jun 2013.
  2. Esquível, Manuel L. & Veiga, Carlos & Wystup, Uwe, 2010. "Unifying exotic option closed formulas," CPQF Working Paper Series 23, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
  3. Björk, Tomas & Blix, Magnus & Landen, Camilla, 2005. "On finite dimensional realizations for the term structure of futures prices," Working Paper Series in Economics and Finance 620, Stockholm School of Economics.

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