CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
An investor entered a long forward contract to buy an asset at 100. At a later date, the forward price for the same maturity is 108. Ignoring discounting, the value of the investor's position at that date is most likely:
The long position has a gain of 8. The investor is locked in to buy at 100 while the current forward price for the same maturity is 108, so the contract is worth the 8 difference before discounting. Forwards start at zero value but change as prices move.
- Aa gain of 8 for the long position.Correct
- Ba loss of 8 for the long position.
- Czero, because forwards have no value after initiation.
Explanation
The long holds the right and obligation to buy at 100 while the market forward price is now 108. The position is worth 108 - 100 = 8 (undiscounted). The loss answer reverses the sign, and forwards generally do have non-zero value after initiation.
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