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On the exit value of a forward contract

✍ Scribed by Gabriel J. Power; Calum G. Turvey

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
166 KB
Volume
29
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

Default risk associated with forward contracts can be substantial, yet these financial instruments are widely used to hedge price risk. An objectively priced exit option on the forward contract would help reduce the likelihood of litigation associated with contract default. A method is proposed to compute the exit option's value for an arbitrary forward contract, using Black's (1976) model and option premium data. The time series dynamics of the exit option value are confirmed to be, like its underlying, well described by a martingale with heavy‐tailed (Student) GARCH residuals. Β© 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29: 179–196, 2009

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