Investments, tenth edition

 Example  23.8 

Commodity Futures Pricing 

  Discounted Cash Flow Analysis for Commodity Futures 

 Given the current expectation of the spot price of the commodity at some future date and 

a measure of the risk characteristics of that price, we can measure the present value of 

a claim to receive the commodity at that future date. We simply calculate the appropri-

ate risk premium from a model such as the CAPM or APT and discount the expected 

spot price at the appropriate risk-adjusted interest rate, as illustrated in the following 

example. 

 

 The general rule, then, to determine the appropriate futures price is to equate the present 

value of the future payment of  F  

0

  and the present value of the commodity to be received. 

This  implies   

F

0

(1

1 r

f

)

T

5

E(P

T

)

(1

1 k)

T

 

or   

 

F

0

5 E(P

T

)

¢

1

1 r

f

1

1 k

≤

T

 

 (23.4)  

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7/25/13   2:01 AM

7/25/13   2:01 AM

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  Futures, Swaps, and Risk Management 

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