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A Note on Forward Price and Forward Measure

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Abstract

The forward measure is convenient in calculating various contingent claim prices under stochastic interest rates. We demonstrate that caution needs to be drawn when the forward measure is used to price contingent claims that involve multiple cash flows. We also derive partial different equations for the forward price to demonstrate how forward contracts can be used for dynamic hedging and how hedges can be conducted if the payoff of a contingent claim depends on the forward price.

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Authors and Affiliations

  1. FOM/SOB-NB, Rutgers University, Levin Bldg., Rockafeller Rd., Piscataway, NJ, 08854

    Ren-Raw Chen

  2. Smeal College of Business, Penn State University, University Park, PA, 16802

    Jing-Zhi Huang

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  1. Ren-Raw Chen
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  2. Jing-Zhi Huang
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Correspondence to Ren-Raw Chen.

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Chen, RR., Huang, JZ. A Note on Forward Price and Forward Measure. Review of Quantitative Finance and Accounting 19, 261–272 (2002). https://doi.org/10.1023/A:1020715407939

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  • DOI: https://doi.org/10.1023/A:1020715407939

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