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Some time ago, a company negotiated a long forward contract to purchase 100 ounces of gold...

Some time ago, a company negotiated a long forward contract to purchase 100 ounces of gold at the price of $1400 per ounce. The contract will expire in three months (from now). The current three-month forward price of gold is $1420 per ounce. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the forward contract to the company?

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Answer #1

Value of forward contract = (current forward price - forward purchase price) * number of ounces * e-rt,

where r = risk free rate

t = time to expiration in years.

Value of forward contract = (1420 - 1400) * 100 * e-0.08*(3/12)

Value of forward contract = $1,960.40.

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