Description
Describes topics like comparison of theoretical and market future prices of stocks in India and abroad.
Comparison of theoretical and market Future prices of Stock Indices and Stocks in India and developed markets abroad. Derivatives and Risk Management
Project Objective: Develop a theoretical model for future prices of different underlying and compare it with the future prices in NSE, NASDAQ and Tokyo Stock Exchange. Back Ground and Methodology: A Futures contract is specified for a period of time, at the end of which it is settled. Theoretical Future price should factor the current price and holding costs. In order to compensate the seller for waiting till expiry for realizing the sale proceeds the buyer has to pay some interest which is reflected in the form of cost of carry. Futures Price = Spot Price + Cost of Carry The Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue which may result in this period. There are other complex theoretical models available in literature which would be evaluated. Theoretical Future prices can also be found using the formula F0=S0*e^(rT) One more model which predicts the theoretical prices is as follows: F0= S0+ S0*(r-y) Where F0= Future Prices today, S0= Spot Prices, T=time until delivery date, r= zero coupon risk free rate of return, y = cash yield on underlying asset. These theoretical prices would be compared with the market future prices using the goodness of fit tests .The best possible theoretical model would be found. A difference in the theoretical prices and market prices is expected because of the assumptions in the model.
The basic assumptions in the theoretical models are:
1. No interim cash flow due to variation in margins are assumed further any cash flow payments from the underlying assets are assumed to be paid at the delivery date rather than at an interim date. 2. The borrowing rate and lending rate are equal. 3. Transaction costs are ignored. 4. The underlying asset for some futures contract is not a single stock but a basket of assets, or an index. Instead of buying or selling every asset in the index, a portfolio of a smaller number of assets may be considered to track the index, which may lead to disparity in tracking the index. The evaluation would be done using data for 2 years between Jan 2007 and Jan 2009.
doc_875464801.docx
Describes topics like comparison of theoretical and market future prices of stocks in India and abroad.
Comparison of theoretical and market Future prices of Stock Indices and Stocks in India and developed markets abroad. Derivatives and Risk Management
Project Objective: Develop a theoretical model for future prices of different underlying and compare it with the future prices in NSE, NASDAQ and Tokyo Stock Exchange. Back Ground and Methodology: A Futures contract is specified for a period of time, at the end of which it is settled. Theoretical Future price should factor the current price and holding costs. In order to compensate the seller for waiting till expiry for realizing the sale proceeds the buyer has to pay some interest which is reflected in the form of cost of carry. Futures Price = Spot Price + Cost of Carry The Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue which may result in this period. There are other complex theoretical models available in literature which would be evaluated. Theoretical Future prices can also be found using the formula F0=S0*e^(rT) One more model which predicts the theoretical prices is as follows: F0= S0+ S0*(r-y) Where F0= Future Prices today, S0= Spot Prices, T=time until delivery date, r= zero coupon risk free rate of return, y = cash yield on underlying asset. These theoretical prices would be compared with the market future prices using the goodness of fit tests .The best possible theoretical model would be found. A difference in the theoretical prices and market prices is expected because of the assumptions in the model.
The basic assumptions in the theoretical models are:
1. No interim cash flow due to variation in margins are assumed further any cash flow payments from the underlying assets are assumed to be paid at the delivery date rather than at an interim date. 2. The borrowing rate and lending rate are equal. 3. Transaction costs are ignored. 4. The underlying asset for some futures contract is not a single stock but a basket of assets, or an index. Instead of buying or selling every asset in the index, a portfolio of a smaller number of assets may be considered to track the index, which may lead to disparity in tracking the index. The evaluation would be done using data for 2 years between Jan 2007 and Jan 2009.
doc_875464801.docx