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CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments

A trader holds a long forward to buy 1,000 units at 50. At expiration the spot price is 46. A separate holder owns a put on 1,000 units with strike 50 and paid a premium of 2 per unit. The payoffs at expiration (excluding the premium for the put) for the forward holder and the put holder, respectively, are closest to:

The forward holder loses (46 - 50) x 1,000 = 4,000, a payoff of -4,000. The put is in the money by 4 per unit, so its payoff before premium is 4,000. The answer is -4,000 and 4,000.

  1. A-4,000 and 0
  2. B-4,000 and 4,000Correct
  3. C0 and 4,000

Explanation

Long forward payoff = (46 - 50) x 1,000 = -4,000. Put payoff = max(50 - 46, 0) x 1,000 = 4,000, before the 2,000 premium. The 0 payoffs would wrongly assume the forward cannot lose or the put is out of the money.

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