**Derivatives**

**Reading 49. Basics of Derivative Pricing and Valuation**

**Learning Outcome Statements**

b. distinguish between value and price of forward and futures contracts;

*CFA Curriculum, 2020, Volume 6*

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### Subject 2. The Concept of Pricing vs. Valuation

*Example*

Two parties agree to a forward contract to deliver a zero-coupon bond at a price of $97 per $100 par in 3 month.

At initiation date:

- Value: 0
- Price: $97

At the contract's expiration, suppose the underlying zero-coupon bond is selling at a price of $97.25. The long is due to receive from the short an asset worth $97.25, for which a payment to the short of $97 is required.

- Value: $0.25
- Price: $97

###
**User Contributed Comments**
3

You need to log in first to add your comment. ###### jiba

The example given in the textbook is wrong. No rational investor will never hold a stock priced at $102 today, and buy a forward contract to sell it at $100 one year from now. Why would the investor sell the stock now and deposit the $102 in the bank? In one year the investor would get $102 + risk-free interest.

###### niuniucow

what if, it is probable that the stock price will fall below $100.So forward contract is wise enough here and with in a year investor can earn a interest of $4.08. depositing some where else for risk free rate.

###### Memeteau

Jiba. The assumption of textbook is just that an investor owns a stock and a forward contract at t=0. Then, they give us a way to differentiate forward contract value at that time and its fixed price at initiation . To determinate V0, you have to assume the hedging. Never mind that the investor is rational or not.