- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 5. Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
- Subject 2. Pricing and Valuation of Forward Contracts
CFA Practice Question
John has an asset that is worth $110. He plans to sell it in 8 months. The risk-free interest rate is 4.5%. Suppose the forward contract is entered into at $113.28 (as computed in question 1). Four months later, the price of the asset is $105. What's the market value of the forward contract at this point in time from John's perspective?
Correct Answer: $6.63
In this case:
- T - t = 8/12 - 4/12 = 4/12
- St = 105
- F(0, T) = 113.28
- Vt(0, T) = V4/12(0, 8/12) = 105 - 113.28/(1.045)4/12 = -6.63
User Contributed Comments 4
| User | Comment |
|---|---|
| vi2009 | Got to remember that T = # of months to expiration. therefore T - t = 8/12 - 4/12 = 4/12 |
| joywind | no, vl2009 T = term of the contract from initiation to close = 8 months t = time past = 4 months T-t = time to expiration = 4 months |
| forry9er | Stick to the principles of discounting! The answer should be 6.65. Divide (i) by the # of compounding periods, then multiply (N) by # of compounding periods. |
| Sagarsan88 | Agree forrey9e |