Case a: 3 Year Forward Price
Spot price of the asset = $30
risk free rate = 10%
no. of years = 3
Forward price (F) = S * e(r * t)
where, F = forward rate; S = spot rate; r = risk free rate; t = time period; e = 2.7183
F = $30 * (2.7183)(10% * 3)
= $30 * (1.349862)
F = 40.49585
Case b: Initial value of the forward contract:
Forward contracts do not require early payment or down payment since no money changes hands at the initial agreement, so no value can be attributed to it.
Case c: Two and half years later spot price is $35 and risk free rate is 8%:
Spot price after 2.5 years = $35
risk free rate = 8%
Here we are assuming that the forward rate for the 3rd year is to be calculated. Hence 2.5 years is completed then the remaining period of time would be 0.5 years.
F = S * e(r * t)
F = $35 * (2.7183)(8% * 0.5)
F = $35 * 1.040811
F = $36.42839
A three-year long forward contract is entered into when the spot price of an investment asset...
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