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CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities

A long position in a forward contract on a non-dividend-paying stock was initiated some time ago. Since initiation, the spot price of the stock has risen and interest rates have not changed. The value of the long position to the holder is most likely:

The long position most likely has a positive value. Its value equals the spot price minus the present value of the agreed forward price, so a higher spot price with unchanged interest rates makes the long position worth more than zero, while the short position is correspondingly negative.

  1. Anegative
  2. Bzero
  3. CpositiveCorrect

Explanation

The long forward value at time t equals the spot price minus the present value of the forward price. If the spot price rises while rates stay the same, the spot exceeds the PV of the contract price, so the long position has positive value. A zero value applies only at initiation.

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