A short forward contract that was negotiated some time ago will expire in six months and...
A short forward contract that was negotiated some time ago will expire in six months and has a delivery price of $150 (agreed upon price at inception). Today’s forward price for a six-month forward contract on the same underlying is $173. The six month risk-free interest rate (with continuous compounding) is 5% per year. What is today’s value of the short forward contract?
Homework Answers
If the spot price of the forward contract is "S", the Forward (Delivery) price is "F", the time duration till settlement "T", and the risk-free rate of interest "r", the value of forward contract "V" is calculated as:
V = S - [ F / { (1+r)^T } ]
i.e. the difference between spot price of the forward contract and the present value of the forward price.
Plugging the above values for S = $173, F = $150, r = 5% and T = 0.5, we get the value of V:
V = 173 - [ 150 / { (1.05)^0.5 } ] = $26.6
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A short forward contract that was negotiated some time ago will
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