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Why is it important that we can replicate the payoffs to a forward contract by trading in the spot market of the underlying asset and
Why is it important that we can replicate the payoffs to a forward contract by trading in the spot market of the underlying asset and a riskless bond? To assist your thinking, consider an alternative where there is no spot market for the underlying asset. How would the fair forward price be determined then? For example, futures contracts on the average temperature in a city are traded, yet temperature has no spot market.
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