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

At initiation of a forward contract on an asset, the forward price is most likely set so that:

The forward price is set so the contract has zero value to both parties at initiation. It comes from no-arbitrage pricing based on the spot price and carrying costs, not from forecasts of the future spot price, and no cash changes hands at the start.

  1. Athe contract value to both parties is zeroCorrect
  2. Bthe long party pays the spot price at initiation
  3. Cthe forward price equals the expected future spot price

Explanation

The forward price is chosen so that no arbitrage exists and neither party pays anything at initiation, so the contract has zero value. It is derived from the spot price and the cost of carry, not from expectations of the future spot price, and no spot payment is made at inception.

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