Futures Delta and Forward Delta

| July 23, 2013 | 0 Comments

The delta of a futures contract is not the same as the delta of a forward contract. This is often a point of confusion for students. The difference between a forward contract and a futures contract is that  a forward contract is an OTC contract settled at maturity and a futures contract is settled daily using a  margin account with a clearing house.

Forward Delta

The payoff from a long position in a  forward contract on an asset expiring at time \( T \) is \( S_T – K\) where \(S_T\) is the final price of the asset and \( K \) is the agreed purchase or strike price. Assuming constant interest rates, using elementary pricing theory the present value of this payoff at time t  \( V_t \) is
\begin{align*}
V_t = e^{-r (T – t)}\; (\mathbb{E}[S_T|\mathcal F_t] – K) = S_t – e^{-r(T-t)} K
\end{align*}
The Delta \( \frac{\partial V_t}{\partial S_t} \)is 1.

Futures Delta

Let \( F(t,T) \) denote the futures price at time \( t \) for delivery of the asset at time \( T \). The futures contract is settled daily by an amount given by the change in futures price so the delta is \( \frac{\partial F(t,T)}{\partial S_t} \). In this simple situation \( F(t,T) = S_t e^{r (T-t)} \) so the delta is \( e^{r (T-t)} \)

 

Category: Futures, Quantitative Finance General

Leave a Reply

Password Reset
Please enter your e-mail address. You will receive a new password via e-mail.