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No arbitrage argument, proof wanted.

Harkkam

Harkkam

Joined
5/20/12
Messages
46
Points
18
Hey guys I was just curious about something called the no arbitrage argument that states that if you you get into an agreement for a asset to be purchased at a future date at a future price, with no outlay of cash upfront.

That the future contract must grow at the spot interest rate and the cost of that contract in the future can only be the asset plus the risk free interest rate.

That there can be no deviation between the real underlying asset and the forward contract.

Is that correct?

I tried looking for a proof but cant seem to find it.

Thanks
 
This is a classic argument and can be found with a simple Google search.

Merely purchase the asset now and borrow the money to pay for it. Net cost is the asset price multiplied by the spot rate. By the no-arbitrage principle that should be the cost of the forward contract and we're done.
 
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