Definition of Spot futures parity theorem

Spot Futures Parity Theorem Image 1

Spot futures parity theorem

Describes the theoretically correct relationship between spot and futures prices.
Violation of the parity relationship gives rise to arbitrage opportunities.

Related Terms:

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

The most distant months of a futures contract. A bond that sells at a discount and does not
pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-inkind
bond.

Devaluation A decrease in the spot price of the currency

Fisher's separation theorem

The firm's choice of investments is separate from its owner's attitudes towards
investments. Also refered to as portfolio separation theorem.

Futures

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Futures commission merchant

A firm or person engaged in soliciting or accepting and handling orders for
the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection
with such solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades
or contracts. The FCM must be licensed by the CFTC. Related: commission house , omnibus account

Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.

Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.

Futures market

A market in which contracts for future delivery of a commodity or a security are bought or sold.

Futures option

An option on a futures contract. Related: options on physicals.

Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.

Interest rate parity theorem

Interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.

London International Financial Futures Exchange (LIFFE)

A London exchange where Eurodollar futures
as well as futures-style options are traded.

London International Financial Futures Exchange (LIFFE)

London exchange where Eurodollar futures as well as futures-style options are traded.

Most distant futures contract

When several futures contracts are considered, the contract settling last.
Related: nearby futures contract

Mutual fund theorem

A result associated with the CAPM, asserting that investors will choose to invest their
entire risky portfolio in a market-index or mutual fund.

National Futures Association (NFA)

The futures industry self regulatory organization established in 1982.

Nearby futures contract

When several futures contracts are considered, the contract with the closest
settlement date is called the nearby futures contract. The next futures contract is the one that settles just after
the nearby futures contract. The contract farthest away in time from settlement is called the most distant
futures contract.

Next futures contract

The contract settling immediately after the nearby futures contract.

Parity value

Related:conversion value

Portfolio separation theorem

An investor's choice of a risky investment portfolio is separate from his
attitude towards risk. Related:Fisher's separation theorem.

Purchasing power parity

The notion that the ratio between domestic and foreign price levels should equal
the equilibrium exchange rate between domestic and foreign currencies.

Put-call parity relationship

The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).

Relative purchasing power parity (RPPP)

Idea that the rate of change in the price level of commodities in
one country relative to the price level in another determines the rate of change of the exchange rate between
the two countries' currencies.

Separation theorem

The value of an investment to an individual is not dependent on consumption
preferences. All investors will want to accept or reject the same investment projects by using the NPV rule,
regardless of personal preference.

Spot exchange rates

Exchange rate on currency for immediate delivery. Related: forward exchange rate.

Spot interest rate

Interest rate fixed today on a loan that is made today. Related: forward interest rates.

Spot lending

The origination of mortgages by processing applications taken directly from prospective borrowers.

Spot markets

Related: cash markets

Spot month

The nearest delivery month on a futures contract.

Spot price

The current marketprice of the actual physical commodity. Also called cash price.

Spot rate

The theoretical yield on a zero-coupon Treasury security.

Spot rate curve

The graphical depiction of the relationship between the spot rates and maturity.

Spot trade

The purchase and sale of a foreign currency, commodity, or other item for immediate delivery.

Theoretical futures price

Also called the fair price, the equilibrium futures price.

Theoretical spot rate curve

A curve derived from theoretical considerations as applied to the yields of
actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity
greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.

Two-fund separation theorem

The theoretical result that all investors will hold a combination of the riskfree
asset and the market portfolio.

Spot curve, spot yield curve

See Zero curve.

Spot rate

The current interest rate appropriate for discounting a cash flow of
some given maturity.

futures contract

Exchange-traded promise to buy or sell an asset in the future at a prespecified price.

interest rate parity

Theory that forward premium equals interest rate differential.

purchasing power parity (PPP)

Theory that the cost of living in different countries is equal, and exchange rates adjust to offset inflation differentials across countries.

spot rate of exchange

Exchange rate for an immediate transaction.

Futures Contract

A contract in which the seller agrees to provide something to a buyer at a specified future date at an agreed price.

Interest Rate Parity

Theory that real interest rates are approximately the same across countries except for a risk premium.

Purchasing Power Parity

Theory that says that over the long run exchange rate changes offset any difference between foreign and domestic inflation. This result assumes that the real exchange rate remains constant, something that is not true even in the long run.

Spot

For immediate payment and delivery, as opposed to future payment and delivery.

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