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?
A. +$2.00
B. ?$2.00
C. +$1.96
D. ?$1.96
D
The contract gives one the obligation to sell for $40 when a forward price negotiated today would give one the obligation to sell for $42 . The value of the contract is the present value of −$2 or −2e-0.08×0.25 = −$1.96 .
You might also like to view...
The mass media is considered part of an organization's _____.
A. general environment B. task environment C. internal stakeholders D. macroenvironment E. distribution network
Why are integrative agreements better than compromise agreements?
a. Compromise agreements develop a win-win agreement. b. Cognitive dissonance can generate feelings of frustration, regression, fixation, and aggression. c. Integrative agreements are more stable and mutually rewarding. d. Each party makes concessions on high-priority issues in exchange for concessions on low-priority issues.