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Forwards and Futures

In: Derivatives

Author

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  • Jiří Witzany

    (University of Economics Prague)

Abstract

Forwards are, in general, OTC contracts to buy or sell a specified asset at a specified price, at a future time, and settled later than for normal spot operations. Futures are similar contracts traded on organized exchanges. The arbitrage idea applied in the previous chapter to FX forwards can be generalized to obtain a precise relationship between the spot and the forward (Futures) prices of a general investment asset that must hold on an arbitrage-free and perfectly liquid market. This relationship turns out to be weaker for consumption storable assets, and in particular for non-storable assets such as electricity or some agricultural commodities. In this chapter, we will also discuss how to use forwards and futures to hedge risk in various positions and portfolios.

Suggested Citation

  • Jiří Witzany, 2020. "Forwards and Futures," Springer Texts in Business and Economics, in: Derivatives, edition 1, chapter 2, pages 19-42, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-51751-9_2
    DOI: 10.1007/978-3-030-51751-9_2
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