Ask Question
10 March, 00:54

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?

+4
Answers (1)
  1. 10 March, 03:42
    0
    -$1.96 is the value.

    Explanation:

    The contract gives obligation to sell for $40 when a forward price negotiated today would give one obligation to sell for $42.

    The value of contract is present value of

    40 - 42 = - $2

    The rate is at 8%

    8% = 0.08

    3 months = 3/12 = 0.25 years

    The present value can be calculated as

    Value of present contract = - 2e^ (0.08 x 0.25)

    Value of present contract = - $1.96
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “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 ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers