Hello everyone Please anyone help me with this qus. attached below. It's a new case I have seen here which I can't see in the chapter. There we are taught to calculate the value of forward contract at some *intermediate* time r. And at page16 of ch13, it is written that at time 0, the value of contract for buyer and seller is zero and at maturity date , it is ±(Ko-St). But I didn't get this qus. At what time they are asking to find the value of contract? And how to calculate that? They are considering the present value of delivery price and subtracting it from PV of forward price, why PV? It would mean that it is the value of contract at start but it should be 0 isnt? Please anyone clarify asap. Thankyou
The answer shown is presented differently to the approach shown in the chapter. But the approach in the chapter still works. Remember that you need to get to the right answer - and the examiners solution is just one way of getting there. The general formula for the value of the LONG position on a forward contract is: (Kr - K0) exp(-delta(T-r)) (page 17, Ch13) You need the value of the forward contract "now" when there is 1 year remaining. The question doesn't say when the forward contract was first struck (that was at some point in the past), but it doesn't matter since we know the agreed forward price at outset was 112 per 100 nominal. This is K0. We now need to calculate the forward price that would be agreed on the contract now. This is Kr. We calculate this using the formula for the forward price on an asset that pays discrete income: Kr = (105 - 3*(1.05)^(-0.5) - 3*(1.055)^(-1))*1.055 = 104.686 per 100 nominal Then the value of the long forward position is: (104.686 - 112)*1.055^(-1) = - 6.932 per 100 nominal and the value of the short position is the negative of this.
Here it is. Hope I got the correct answer. Let me know if its not correct and if you have any doubt in it.
