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A Note on Forward Price and Forward Measure

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  • Chen, Ren-Raw
  • Huang, Jing-Zhi

Abstract

The forward measure is convenient in calculating various contingent claim prices under stochastic interest rates. We demonstrate that caution needs to be drawn when the forward measure is used to price contingent claims that involve multiple cash flows. We also derive partial different equations for the forward price to demonstrate how forward contracts can be used for dynamic hedging and how hedges can be conducted if the payoff of a contingent claim depends on the forward price. Copyright 2002 by Kluwer Academic Publishers

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  • Chen, Ren-Raw & Huang, Jing-Zhi, 2002. "A Note on Forward Price and Forward Measure," Review of Quantitative Finance and Accounting, Springer, vol. 19(3), pages 261-272, November.
    • Handle: RePEc:kap:rqfnac:v:19:y:2002:i:3:p:261-72
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    Cited by:

    1. Lutz Hahnenstein & Klaus Röder, 2007. "Who hedges more when leverage is endogenous? A testable theory of corporate risk management under general distributional conditions," Review of Quantitative Finance and Accounting, Springer, vol. 28(4), pages 353-391, May.

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