A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40.The current forward price for three-month forward contract is $42.The three month risk-free interest rate (with continuous compounding)is 8%.What is the value of the short forward contract?
A) +$2.00
B) −$2.00
C) +$1.96
D) −$1.96

Question

Quizplus · Accepted Answer

The contract gives one the obligation to sell for $40 when a forward price negotiated today would give one the obligation to sell for $42.The value of the contract is the present value of −$2 or −2e^-0.08×0.²⁵= −$1.96.

A Short Forward Contract That Was Negotiated Some Time Ago