CFA Practice Question

There are 206 practice questions for this study session.

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
As John is "short," the value of the contract to him in this problem is positive $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
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