Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 0417: On the Term Structure of Futures and Forward Prices

Tomas Björk () and Camilla Landen ()
Additional contact information
Tomas Björk: Department of Finance, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Camilla Landen: Department of Mathematics, Postal: Royal Institute of Technology, S-100 44 Stockholm, Sweden

Abstract: We investigate the term structure of forward and futures prices for models where the price processes are allowed to be driven by a general marked point process as well as by a multidimensional Wiener process. Within an infinite dimensional HJM-type model for futures and forwards we study the properties of futures and forward convenience yield rates. For finite dimensional factor models, we develop a theory of affine term structures, which is shown to include almost all previously known models. We also derive two general pricing formulas for futures options. Finally we present an easily applicable sufficient condition for the possibility of fitting a finite dimensional futures price model to an arbitrary initial futures price curve, by introducing a time dependent function in the drift term.

Keywords: term structure; futures price; forward price; options; jump-diffusion model; affine term structure

JEL-codes: E43; G13

40 pages, First version: December 8, 2000. Revised: December 20, 2000.

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