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Forwards, Swaps, Futures and Options

IEOR E4706: Foundations of Financial Engineeringc 2016 by Martin HaughForwards, Swaps, Futures and OptionsThese notes1introduce forwards, swaps, Futures and Options as well as the basic mechanics of their associatedmarkets. We will also see how to price forwards and swaps, but we will defer the pricing of Futures contractsuntil after we have studied martingale pricing. We will see how to price Options within the binomial the exception of the binomial model in Section 4, the underlying probability structure of the financialmarket plays only a small role in these notes.

T is the time Tvalue of the underlying security (or commodity). It is very important to realize that there are two \prices" or \values" associated with a forward contract at time t: f t and F. When we use the term \contract value" or \forward value" we will always be referring to f t, whereas

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