FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures
A trader entered a long forward contract 3 months ago with delivery price K = USD 50 and a total life of 9 months. The stock now trades at USD 54, pays no dividends, and the continuously compounded risk-free rate is 4%. What is the current value of the long forward? (Remaining life is 6 months; e^-0.02 = 0.980199)
A long forward's value equals the spot price minus the present value of the delivery price over the remaining life. With 54 minus 50 discounted for six months at 4%, the value is about USD 4.98. Ignoring discounting would overstate it as USD 4.00 difference only.
- AUSD 4.00
- BUSD 4.98Correct
- CUSD 3.92
- DUSD 5.04
Explanation
Value of long forward f = S0 - K e^(-rT) with T = 0.5 remaining: 54 - 50 x 0.980199 = 54 - 49.010 = 4.99, about USD 4.98-4.99 (closest USD 4.98). USD 4.00 ignores discounting of K. USD 3.92 discounts K in the wrong direction logic by using S0 e^-rT - K.
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