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To: GVTucker who wrote (95358)	1/7/2000 1:35:00 PM
From: Robert Douglas	Read Replies (2) \| Respond to of 186894

Off topic and horribly boring GV, Believe me when I say I'm not questioning your knowledge. It's been a long time since I thoroughly studied this stuff. I just don't remember any risk premium entering into the equation for arbitrage pricing of futures contracts. I pulled out an old (1986) copy of "Managing Investment Portfolios" by John L. Maginn and Donald L. Tuttle. In the chapter on Valuation of Futures and Options Contracts, I read: "The arbitrage pricing process can be described in terms of the following equation: Fo = So + rSo - ySo or, in words, current forward price = current spot price + cost of financing - income from asset. The forward price, as discussed and shown in the previous equation, should equal the spot price today plus the financing cost minus the yield on the asset. Note that the financing rate (r) and the yield (y) represent periodic, not annualized, rates. In the case of stock index futures, note also that ySo represents the dollar dividend paid at the end of the forward period. The equation can be rearranged to read Fo = So + So X (r-y) or, in words, current forward price = current spot price + current spot price X (financing rate - yield) When the financing rate is greater than the yield, the forward price should be above the spot price, or should trade at a premium to cash. When the financing rate is less than the yield, the forward price should be below the spot price, that is, it should trade at a discount to cash." The chapter goes on to give examples of pricing T-Bond and Stock Index Futures Contracts and nowhere do I see a risk premium mentioned. Now maybe this is a Kindergarten book and you're at the graduate school level. I don't know. It just seems to me that the risk preferences of those in the market would matter little compared to the straightforward arbitrage involved.