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Futures Replication and the Law of One Futures Price

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  • Avi Bick

    (Beedie School of Business, Simon Fraser University, Burnaby, BC, V5A 1S6, Canada)

Abstract

We define a synthetic futures contract as a pair consisting of a terminal futures price J (a prespecified random variable) and a zero-value trading strategy whose terminal cumulative cash flow is equal to J to within an additive constant. The construction of synthetic futures contracts is demonstrated for (i) futures on futures, (ii) futures on spot, (iii) quanto futures on futures, (iv) quanto futures on spot and (v) futures on foreign futures and domestic futures. We formulate and derive the Law of One Futures Price, which justifies futures pricing based on such replication.

Suggested Citation

  • Avi Bick, 2024. "Futures Replication and the Law of One Futures Price," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 1-20, March.
    • Handle: RePEc:wsi:qjfxxx:v:14:y:2024:i:01:n:s2010139224500034
    DOI: 10.1142/S2010139224500034
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    Keywords

    Trading strategies; futures pricing; futures-on-futures; quanto futures; derivatives replication; Law of One Futures Price;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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