Question

A short forward contract that was negotiated some time ago will expire in 12-month and has a delivery price of $49.25. The current forward price for the 12-month forward contract is $46.00. The 12-month risk-free interest rate (with continuous compounding) is 6.65%. What is the value of the short forward contract? Answer with two decimal digits accuracy and the correct sign. Example: -11.92

Answer 1

Answer:

$3.04

Explanation:

F = (K - F0)*e^(-r*T) Where f = current value of forward contract, F0 = forward price agreed upon today, K = delivery price for a contract negotiated, r = risk-free interest rate applicable to the life of forward contract, T = delivery date

F = ($49.25-$46.00)*e^(-0.0665*12/12)

F = $3.25*e^(-0.0665)

F = $3.25*0.935662916

F = $3.040904477

F = $3.04

So, the value of the short forward contract is $3.04.