Consider a forward contract whose underlying asset has a holding cost of c_j paid at time t_j, j = 1, 2, ···, M − 1, where time t_M is taken to be the maturity date of the forward. For notational simplicity, we take the initiation date of the swap contract to be time t₀. Assume that the asset can be sold short. Let S denote the spot price of the asset at the initiation date, and we use d_j to denote the discount factor at time t_j for cash received on the expiration date. Show that the forward price F of this forward contract is given by

Transcribed Image Text:

F= = S do + M–1 cj Σ dj j=1