Friday, April 24, 2015

eq-fwd contract - delivery price K

Eg: me buying Blk 155 flat. In Oct we agreed on $615 delivery price. Cash-On-Delivery on the delivery date in Feb. "Logistics"... No exposure no mkt risk.

Eg from [[hull]] P104. $40.50 delivery price means $40.50 cash to change hand on the delivery date.

Simple rule -- No cash flow on execution date - different from most other trades. Simple difference yet very confusing to some.

Simple rule -- To understanding the "delay", we can imagine sky high interest, carry and inflation rates.

Simple rule – Cash-On-Delivery

I feel the delayed cashflow is at the heart of the (simple) arb and math. If we aren't absolutely clear about this delay, big messy confusions ...

EE context -- yes deliver price is an important factor to PnL, risk mgmt etc
QQ context - delivery price is the price quoted and negotiated

Q: In each fwd contract, are there 2 prices?
QQ context – 1 only
EE context – 2 indeed. Similar to simply buying then holding IBM shares. Both prices are relevant in the EE context --
• K is the negotiated "execution" price, implicitly written into the fwd contract
• there's a live market price for the same fwd contract.

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