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

A trader enters a long forward contract to buy 1,000 barrels of crude oil at a delivery price of USD 80 per barrel. At maturity the spot price is USD 86 per barrel. What is the payoff to the long position at maturity?

The long forward earns USD 6,000. The payoff equals the spot price at maturity minus the delivery price, times the quantity: (86 - 80) x 1,000. The buyer pays USD 80 for oil worth USD 86. The short position would lose the same amount.

  1. AUSD 6,000 gainCorrect
  2. BUSD 6,000 loss
  3. CUSD 86,000 gain
  4. DUSD 80,000 loss

Explanation

Long forward payoff = (S_T - K) x quantity = (86 - 80) x 1,000 = USD 6,000. The positive sign means a gain because the buyer pays 80 for an asset worth 86. The loss option reverses the sign, which is the payoff to the short position.

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