Question
How do you replicate a long forward on a non-dividend-paying asset?
Tap to flip
Answer
Buy the asset spot and borrow the purchase price.
Tap to flip back
Question
How does the no-arbitrage forward price differ from the expected future spot price?
Tap to flip
Answer
It is mechanically set by carry, not a market forecast.
Tap to flip back
Question
In a risk-neutral world, how are F0(T) and E(ST) related?
Tap to flip
Answer
They are equal: F0(T)=E(ST).
Tap to flip back
Question
Why does convenience yield reduce a forward price?
Tap to flip
Answer
It is a holding benefit that lowers net cost of carry.
Tap to flip back