Question
5. A short forward contract that was negotiated some time ago will expire in three months...
5. A short forward contract that was negotiated some time ago will expire in three months and has a delivery price (K) of $42. The current forward price (Fo) for three-month forward contract is $40. If Kis larger than Fo, there is a gain for the short forward contract. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? A. $40.50 B. $400.00 C. $7.78 D. $1.96 E. $35.84
Answers
The value of the short forward contract = Present value of (K - F0) = (K - F0) x e-r x t = (42 - 40) x e-8% x 3/12 = $ 1.96
Hence, the correct answer is the option D. $1.96
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