G
Gareth
Member
This doesn't really fit into any subject category (CT8/ST6/ST5), but it's something that occurred to me... can the forward price F_0 = e^(rT)S_0 be derived using the fundamental theorem of asset pricing?
Here's what has confused me:
Value of forward contract at time 0 = V_0
V_0 = E_Q( e^(-rT) (S_T - F_0) | S_0 )
by fundamental theorem of pricing, where Q is the risk-neutral prob measure and payoff of forward is S_T - F_0.
simplifying this gives e^(-rT) x (E_Q(S_T | S_0) - F_0)
Now, under Q, S_T is martingale so:
V_0 = e^(-rT) x (S_0 - F_0) = 0 since the forward has zero initial value. This implies F_0 = S_0.
Where's the fallacy in this argument?
Here's what has confused me:
Value of forward contract at time 0 = V_0
V_0 = E_Q( e^(-rT) (S_T - F_0) | S_0 )
by fundamental theorem of pricing, where Q is the risk-neutral prob measure and payoff of forward is S_T - F_0.
simplifying this gives e^(-rT) x (E_Q(S_T | S_0) - F_0)
Now, under Q, S_T is martingale so:
V_0 = e^(-rT) x (S_0 - F_0) = 0 since the forward has zero initial value. This implies F_0 = S_0.
Where's the fallacy in this argument?