Forward and Futures Pricing
Price a forward or futures contract from the spot price and the cost of carrying the asset to expiry, value an existing contract during its life, and test a quoted price for arbitrage.
Learning focus: the forward price is the spot price carried forward at the risk-free rate, less what owning the asset earns and plus what it costs to hold, because any other price lets someone lock in a riskless profit.
Yields always compound continuously and can be combined with the amounts above.
Uses the same rate, compounding and yields as the contract above.
Holding the spot price and rates fixed, the forward price converges to the spot price as expiry approaches, so the basis shrinks to zero. The dot is today's contract. For this chart, income and costs entered as present values are spread evenly over the contract's life.