Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:**Problem 5: Valuation of a Long Forward Contract**
A long forward contract that was negotiated some time ago will expire in three months and has a delivery price of $50. The current forward price for a three-month forward contract is $52, whereas the spot price is $50.97. The three-month risk-free interest rate (with continuous compounding) is 8%. What, to the nearest cent, is the value of the long forward contract?
**Explanation**
This problem involves the calculation of the value of a long forward contract. Here are some key components involved in solving this problem:
1. **Delivery Price**: The price at which the contract will be settled when it expires, which is $50.
2. **Current Forward Price**: The prevailing price of a similar three-month forward contract today, which is $52.
3. **Spot Price**: The current market price of the underlying asset, which is $50.97.
4. **Risk-Free Interest Rate**: The rate at which money can be borrowed or invested without risk for a period of time, given as 8% per annum with continuous compounding.
To find the value of the long forward contract, we calculate the present value of the difference between the forward price and the delivery price, adjusted for the time to maturity.
*Note: There are no graphs or diagrams provided in the image.*
Expert Solution
Step 1: Introduction:
A financial agreement between two parties to purchase or sell an asset at a defined future date for a specific price is known as a forward contract. Participants can speculate on or protect themselves against future price changes with this contract. Forwards can be customized and traded over the counter, directly between the buyer and seller.
Step by step
Solved in 3 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education