An investor enters into a forward contract to buy 5,000 barrels of oil at $80 a barrel in three months.Two months later,suppose that the one-month forward price of oil is $83 a barrel,and the one-month interest rate is 0%.The value of the contract the investor holds after two months is
A) $- \$ 15,000$
B)+ $15,000
C)+$400,000
D)+$415,000

Question

Quizplus · Accepted Answer

The value of the forward contract after two months can be calculated based on the difference between the contracted forward price and the current forward price for the remaining time until contract settlement. Since the investor agreed to buy oil at $80 a barrel but the current one-month forward price is $83 a barrel, the contract has gained value. The gain per barrel is $3 ($83 - $80), and for 5,000 barrels, the total gain is $15,000. The interest rate is 0%, so there's no need to discount the future value. Therefore, the value of the contract to the investor is +$15,000.

An Investor Enters into a Forward Contract to Buy 5,000 −$15,000- \$ 15,000−$15,000

An Investor Enters into a Forward Contract to Buy 5,000 $- \$ 15,000$