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67
A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract?
A. +$2.00
B. −$2.00
C. +$1.96
D. −$1.96
A. +$2.00
B. −$2.00
C. +$1.96
D. −$1.96
Answer: D
The contract gives one the obligation to sell for $40 when a forward price negotiated today would give one the obligation to sell for $42. The value of the contract is the present value of −$2 or −2e-0.08×0.25 = −$1.96.
The contract gives one the obligation to sell for $40 when a forward price negotiated today would give one the obligation to sell for $42. The value of the contract is the present value of −$2 or −2e-0.08×0.25 = −$1.96.
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015