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A short forward contract that was negotiated some time ago will expire in three months and...

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?
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Answer #1

Solution: -$1.96

Working: The short forward contract holds the delivery price of $40. However when today forward price negotiated would provide the obligation to sell for $42. The contract value is the present value of the differential amount i.e. - $2 or -2 e^-0.08*0.25 = -$1.96.

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