Dynamic Asset Allocation with Forwards and Futures
DYNAMIC ASSET ALLOCATION WITH FORWARD AND FUTURES is an advanced text on the theory of forward and futures markets which aims at providing readers with a comprehensive knowledge of how prices are established and evolve over time, what optimal strategies o
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DYNAMIC ASSET ALLOCATION WITH FORWARDS AND FUTURES
By ABRAHAM LIOUI Bar Ilan University, Israel and
PATRICE PONCET University of Paris I Pantheon-Sorbonne, France and ESSEC Business School, France
Springer
Library of Congress Cataloging-in-Publication Data Lioui, Abraham. Dynamic asset allocation with forwards and futures / by Abraham Lioui and Patrice Poncet p. cm. Includes bibliographical references and index. 1.Capital assets pricing model. 2. Hedging (Finance) 3. Equilibrium (Economics) I. Poncet, Patrice. II. Title. HG4515.2.L56 2005 332.64'524—dc22
ISBN 0-387-24107-8
2004065099
e-ISBN 0-387-24106-X
Printed on acid-free paper.
© 2005 Springer Science+Business Media, Inc. All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, Inc., 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now know or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks and similar terms, even if the are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed in the United States of America. 9 8 7 6 5 4 3 2 1 springeronline .com
SPIN 11050636
To Osnat, Itzhak and Yair To Marie, Agnes, Caroline and Sophie
TABLE OF CONTENTS Preface Acknowledgements Notations
ix xiii xv
Part I: The basics Chapter 1: Forward and Futures Markets Chapter 2: Standard Pricing Results Under Deterministic and Stochastic Interest Rates
3 23
Part II: Investment and Hedging Chapter 3: Pure Hedging Chapter 4: Optimal Dynamic Portfolio Choice In Complete Markets Chapter 5: Optimal Dynamic Portfolio Choice In Incomplete Markets Chapter 6: Optimal Currency Risk Hedging Chapter 7: Optimal Spreading Chapter 8: Pricing and Hedging under Stochastic Dividend or Convenience Yield
37 59 81 93 117 143
Part III: General Equilibrium Pricing Chapter 9: Equilibrium Asset Pricing In an Endowment Economy With Non-Redundant Forward or Futures Contracts Chapter 10: Equilibrium Asset Pricing In a Production Economy With Non-Redundant Forward or Futures Contracts Chapter 11: General Equilibrium Pricing of Futures and Forward Contracts written on the CPI
165
197 221
References
251
Subject Index
261
Preface This book is an advanced text on the theory of forward and futures markets which aims at providing readers with a comprehensive knowledge of how prices are established and evolve in time, what optimal strategies one can expect the participants to follow, whether they pertain to arbitrage, speculation or hedging, what characterizes such markets and what major theoretical and practical differences distinguish futures from forward contracts. It should be of interest to students (MBAs majoring in finan
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