Simple Forward Q

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dimitrous

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Consider a security that sells for $1000 today. A forward contract on this security that expires in one year is currently priced at $1100. The annual rate of interest is 6.75%. Assume that this is an off-market forward contract.
Calculate the value of the forward contract today.
State whether payment is made by the long or the short and explain.
(from CFA practice problems)
 
The real value should be 1067.5 . So the long pays the short the difference of 32.5. Is that close?
T/G
 
Trader/God Wrote:
——————————————————-
> The real value should be 1067.5 . So the long pays
> the short the difference of 32.5. Is that close?
>
> T/G
I would take the PV of that 32.5/1.0675 = 30.445
 
i get the same number as god. (wanted to say that)
but if the no arbitrage price is 1067.5, what does it mean that it’s priced at 1100? they mean the guy got long at 1100 and now it’s worth 1067.5, correct?
 
don’t think you need the present value. you already discounted the no arbitrage number back.
 
i’m delirious from the lack of sleep.. you can ignore my posts.
 
If you are long this,means that you agree to buy with 1100 at expiration which is too much. So you need to compensated. Short pays long 32.5/1.0675 = 30.44
 
This sentence “A forward contract on this security that expires in one year is currently priced at $1100” is messed. How about “An off-market forward contract with forward price of $1100 is worth how much?”
 
The answer is:
V = 1000 - 1000/1.0675 = -30.44
Because the value is negative, the payment is made by the short to the long.
disptra, you got it.
 
so what was the 1100? he didnt enter into a contract to buy at 1100???
 
He just had a typo, 1100 is in the numerator as it’s the forward price.
 
i had some trouble trying to understand what they were asking. not good, considering it came from cfai.
 
pff I don’t thnk I am getting this and this is really a basic conept….
We are valuing the forward from the long’s perspective, so a positive value means the long is profiting and negative means the long is losing. So, -30.44 should be maid from the long to the short, the way I understand it….
thanks
 
OFF MARKET … is the key .
and value to the long is -30.44
so short needs to pay the long.
 
ngeorgiev wrote:
pff I don’t thnk I am getting this and this is really a basic conept….
We are valuing the forward from the long’s perspective, so a positive value means the long is profiting and negative means the long is losing. So, -30.44 should be maid from the long to the short, the way I understand it….
thanks
Click to expand...
Indeed long pays short -30.44 (however it probably more practical to receive 30.44 from the short rather than pay him a negative amount).
 
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