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FRM Part I · FRM Exam Part I · Introduction to Derivatives

A fund entered a long forward on 2,000 shares at a delivery price of USD 50 and simultaneously a short forward on 3,000 shares of the same stock at a delivery price of USD 52, both maturing on the same date. At maturity the stock price is USD 55. What is the fund's net payoff?

The net payoff is a USD 1,000 gain. The long forward earns (55 - 50) x 2,000 = USD 10,000, while the short forward loses (55 - 52) x 3,000 = USD 9,000. Adding the two gives a net gain of USD 1,000.

  1. AUSD 1,000 lossCorrect
  2. BUSD 4,000 loss
  3. CUSD 10,000 gain
  4. DUSD 1,000 gain

Explanation

Long payoff = (55 - 50) x 2,000 = +10,000. Short payoff = (52 - 55) x 3,000 = -9,000. Net = +10,000 - 9,000 = USD 1,000 gain. Hence the gain option is correct; the loss option wrongly reverses the net sign.

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