CFAI question PG 50- Derivatives Book 6

[dlanuez]

I have worked through the question on Page 50 for the CFAI text for forward contracts and I am confused by a couple of minor points.
For question #1, it asks the “value” of the of the forward contact at inception. I thought the value of a forward contract at inception (initiation) was always zero to prevent arbitrage. Of course, I know that the CFAI has to be right, so assuming that the value is negative 30.44, as indicated in the answer key, why is the short paying the long? In answer 2c, for instance, the value is negative 11.44 and that represents a gain to the short. Is it because we are comparing inception to expiration that the conclusion is different?

 

[cpk123]

it is one of the off-market contracts… hence short pays the long to initiate the contract…

 

[mohammad.belaal]

Like you already mentioned, the negative value in 2c indicates gain to the short. Apply this to first part. There is a contract which initially has value -30.44. It implies that the short is having advantage in it and this is an off market contract. So to ‘level’ that thing up the short pays the long so that no party is at benefit and the contract is initiated.
I hope it helps.