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Probability and Computational Finance Seminar
Sergio Pulido
Carnegie Mellon University
Title: Futures contracts in financial markets with short sales prohibitions

Abstract: Trading in futures markets is used as a mechanism to overcome short selling limitations of spot markets. The reason for this is that futures prices are believed to have dynamics, which up to factors depending on interest rates, resemble those of the underlying price processes. In this paper we study the theoretical implications that short sales prohibitions could have on no arbitrage futures prices in general semi-martingale financial models and on the hedging strategies of agents who desire to have a short position on the underlying price process through futures contracts. Contradicting the above mentioned general belief, we present some mathematical examples when the theoretical behavior of futures prices differs radically from that of the underlying price processes, even after taking interest rates into consideration.

Date: Monday, November 29, 2010
Time: 5:00 pm
Location: Wean Hall 8220
Submitted by:  Steve Shreve