Question

A long position of the three-month forward contract on a commodity that was negotiated three months ago has a delivery price of $40. The current forward price for a three-month forward contract is $42. The current spot price of this commodity is also $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of this long forward contract now

Answer 1

Answer:

$1.96

Explanation:

The disparity between the delivery price and the actual forward price discounted at the specified discount rate will be the current value.

Thus, it can be calculated by using the following formula:

$Value = \dfrac{forward price - Delivery price}{e^{(rate * \dfrac{no \ of \ months}{12})}}$

$Value = \dfrac{42 - 40}{e^{(0.08 * \dfrac{3}{12})}}$

$Value = \dfrac{2}{e^{0.02}}$

$Value = \dfrac{2}{1.02020134}$

$\mathbf{Value =\ 1.96 }$