You just mix up everything again.Forward price is adjusted for dividends during the contract term.I want it to be adjusted for dividends (or cash flow) after the contract term, that constitutes the risk premium/discount.

what you want isn't really relevant here.and since this discussion isn't going anywhere i'll leave it here if you don't mind.

QuoteOriginally posted by: torontosimpleguyMan, spot price is a discounted cash flow (with or without risk). Learn finance.That's may be the theory, but there are so many companies that don't issue dividends that I don't think this is accurate.

QuoteOriginally posted by: Lepperbewhat you want isn't really relevant here.and since this discussion isn't going anywhere i'll leave it here if you don't mind.Sure. I believe lots of theoretical confusions in modern finance will be fixed soon since Black-Scholes theory brought really good minds into industry.

QuoteOriginally posted by: torontosimpleguyForward price of company's stock with contract term longer than 5 years is zero (stock is worthless). Forward price of company's stock with contract term less but close to 5 years is approaching zero (time of company's existence is close to zero).No it's not. Presumably when the company dissolves, the equity is going to get split up among the share holders. The forward price of any contract that doesn't expire before the company dissolves is not going to approach zero.QuoteAfter project time (say 5 years), the company becomes gloomy but it still exists. Spot stock price incorporates this info of course. Should the buyer of forward price include info about lucrative contract into the price? If "yes" then buyer asks for appropriate discounts to the forward price. If "no" then buyer can obviously loose his money.I don't see why. The company does that lucrative contract, it has money from that contract. That money has to go somewhere, so either it goes out in the form of dividends, or the company keeps the money and does something with it. In either case, the stock price is not going to collapse when the contract ends.

For twofish:Value of company is its book value and its earning power. I look at the company in those examples as an entity that earns cash for its shareholders, which doesn't have a book value. So any retained earnings are immediately passed to shareholders.

QuoteOriginally posted by: torontosimpleguySure. I believe lots of theoretical confusions in modern finance will be fixed soon since Black-Scholes theory brought really good minds into industry.too bad there won't be any room for you when you've finished college.

QuoteOriginally posted by: Lepperbetoo bad there won't be any room for you when you've finished college.I thought you've already left this thread. Did you come back to tell me that I won't be rich?

QuoteOriginally posted by: torontosimpleguyFor twofish:Value of company is its book value and its earning power.Discounted for risk. The point everyone has been making is that the risk of bankruptcy is already in the spot price of the stock.Quote I look at the company in those examples as an entity that earns cash for its shareholders, which doesn't have a book value. So any retained earnings are immediately passed to shareholders.If retained earnings are going to be passed to shareholders then you have to take into account the dividend when you are pricing the stock forward. If the dividends are such that the value of the company is going to be zero at the end of the five years, then the price of the forward is also going to be zero once you take into account the dividend payment in the forward price.But if it is an equity instrument, the management has a right not to issue a dividend. This isn't going to affect the spot price, but it will be affect the forward price.

QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: Lepperbetoo bad there won't be any room for you when you've finished college.I thought you've already left this thread. Did you come back to tell me that I won't be rich? there isn't necessarily a relation between understanding finance and becoming rich

1. Book value and earning power are not discounted for risk. Cash flow is discounted for risk.2. About dividends. According to arbitrage, dividends received during the contract term decrease the forward price. According to logic, dividends (or better say cash flow) received after the contract term expiration increase the forward price.I believe I'm wasting my time here. I'm not interested in continuing this topic anymore.P.S. I better prove my ideas to market than to forum.

QuoteOriginally posted by: torontosimpleguyP.S. I better prove my ideas to market than to forum.I'm sure the market would love to teach you.

QuoteOriginally posted by: LepperbeQuoteOriginally posted by: torontosimpleguyP.S. I better prove my ideas to market than to forum.I'm sure the market would love to teach you.Whatever… Better to be able to generate erroneous but original ideas than to be fruitless. I believe in my ideas (and I already started working on particular algorithm) and I don't let some jerk to put me down. Arrivederci.

QuoteOriginally posted by: torontosimpleguy2. About dividends. According to arbitrage, dividends received during the contract term decrease the forward price. According to logic, dividends (or better say cash flow) received after the contract term expiration increase the forward price.Doesn't this explain the futures prices for various terms for the 5-year bridge-building company? A 6-year futures contract for that company is worthless because, in dissolving the company at the 5 year mark, the equity holders (but not the futures holders) would get their capital back as a dividend-like payment. A futures contract that expires before the liquidation date would reflect the full value of company. If the company has some low chance of continuing, then the long-term (6-year) futures contract would reflect the possibility that no capital-returning payment will be made at the 5-year mark.The key is that the real difference between holding liquid equity and holding a liquid futures contract is that the equity holder has rights to both retained and disbursed cashflow and capital whereas the futures holder only has rights to retained cashflow and capital. To the extent that disbursements of dividends and capital are uncertain during the term of the contract, the price of that contract will differ from the equity price and need to include a risk premium (assuming the futures buyers are risk-averse).

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: torontosimpleguy2. About dividends. According to arbitrage, dividends received during the contract term decrease the forward price. According to logic, dividends (or better say cash flow) received after the contract term expiration increase the forward price.Doesn't this explain the futures prices for various terms for the 5-year bridge-building company? A 6-year futures contract for that company is worthless because, in dissolving the company at the 5 year mark, the equity holders (but not the futures holders) would get their capital back as a dividend-like payment. A futures contract that expires before the liquidation date would reflect the full value of company. If the company has some low chance of continuing, then the long-term (6-year) futures contract would reflect the possibility that no capital-returning payment will be made at the 5-year mark.The key is that the real difference between holding liquid equity and holding a liquid futures contract is that the equity holder has rights to both retained and disbursed cashflow and capital whereas the futures holder only has rights to retained cashflow and capital. To the extent that disbursements of dividends and capital are uncertain during the term of the contract, the price of that contract will differ from the equity price and need to include a risk premium (assuming the futures buyers are risk-averse).I don't want to reveal here my trading strategy, which I (hopefully) already figured out.I just remind you arbitrage formula for forwards/futures on stock paying the dividends,F=S*exp((r-q)*t) where r - risk-free rate, q - dividend yield.Let restrict ourselves to t<=T (5 years) and assume for simplicity that q<r.According to arbitrage, when t->T it follows F is monotonically increasing and F->S*exp((r-q)*T).According to logic, F(T)=0 (no cash flow after cutoff point of 5 years) so when t->T logic requires F is [monotonically] decreasing and F->0.