Chapter 8: Pricing and Valuation of Forwards and Futures

In this section

• Valuation of Forward Contracts at Initiation, During the Life, and at Expiry
  Learn how forward contracts are valued at inception, during the contract life, and at maturity—core insights for CFA® Level I Derivatives mastery.
• Determining Forward Prices for Various Underlyings
  A comprehensive capstone-level exploration of forward pricing for different asset classes, highlighting cost-of-carry, dividends, storage costs, convenience yields, currency interest differentials, and forward rate agreements.
• Relationship between Spot, Forward, and Futures Prices
  Explore the intricate connections between spot, forward, and futures prices under no-arbitrage conditions, learn how daily mark-to-market mechanisms influence these relationships, and understand the impact of interest rate volatility on futures pricing.
• Impact of Storage Costs and Convenience Yields
  Explore how storage costs and convenience yields influence forward and futures pricing, shaping market structures such as contango and backwardation in commodity markets.
• Convergence and Delivery
  Explore how futures prices align with underlying spot prices at expiry, the mechanics of physical and cash settlement, and the importance of delivery protocols in maintaining arbitrage-free markets.
• Hedging Strategies Using Forwards and Futures
  Learn how to manage price risk through short and long hedging strategies, rolling hedges, and understanding basis risk and contract details.
• Contango, Backwardation, and Term Structure of Futures Prices
  Exploring the fundamentals and real-world implications of contango and backwardation in futures markets, as well as the role of term structure across different maturities.
• Deliverable vs. Cash-Settled Contracts
  A comprehensive exploration of physical versus cash settlement in futures, examining their distinctions, pricing, risks, and real-world applications.
• Term Structure of Interest Rates in Forward Pricing
  Learn how the shape and dynamics of the yield curve affect forward and futures valuation, with practical examples for FRAs, bond futures, and more.
• Volatility Index Futures (VIX and Others)
  A comprehensive exploration of volatility index futures, such as the famed VIX, focusing on how they measure implied volatility, key contract specifications, practical hedging uses, and advanced applications in portfolio management.
• Seasonality Adjustments in Commodity Pricing
  Discover how seasonal factors influence both spot and futures prices in commodity markets, learn how to model such patterns, and explore practical hedging and risk management techniques.
• Basis Trading in Commodity Markets
  Explore the nuances of basis trading in commodity markets, including how changes in local cash and futures prices affect hedgers and speculators, key influences on basis movements, and best practices for managing basis risk.
• Machine Learning Approaches to Seasonal Commodity Pricing
  Explore how advanced machine learning techniques like random forests and neural networks can uncover seasonal patterns and predict price movements in commodity markets.
• Impact of Circuit Breakers on Derivative Trading
  Explore how circuit breakers and trading halts shape derivative markets, manage volatility, and affect hedgers and speculators.
• Cross-Exchange Arbitrage Strategies
  Discover how traders exploit price discrepancies across multiple exchanges in futures markets, the role of high-frequency trading, and the key considerations for implementing and managing cross-exchange arbitrage strategies successfully.
• Zero-Cost Collar Strategies in Commodity Markets
  Explore how zero-cost collar strategies help commodity producers hedge downside price risk while capping upside gains, using practical examples and real-world insights.
• Commodity Index Futures
  Explore how commodity index futures provide a broad market exposure across energy, metals, and agriculture, including roll schedules, collateral yields, and index methodologies.
• Negative or Zero-Bound Interest Rate Environments
  Explore how negative or zero-bound interest rates affect the pricing and valuation of forwards and futures, highlighting cost-of-carry, arbitrage relationships, and real-world applications.