Suppose you bought a forward on January 1 that matures a year later.The forward price was $214 at that time and the simple interest rate was 7 percent per year.Six months have passed,and the spot price is now $190.The value of your forward contract today is:

Question

Quizplus · Accepted Answer

The calculation of the value of the forward contract would be:

Forward price * (1 + Simple interest rate * Time) - Spot price

Forward price = $214
Simple interest rate = 7%
Time = 0.5 year

So, Forward price * (1 + Simple interest rate * Time) = $214 * (1 + 0.07 * 0.5) = $222.05

Now, using the above formula to calculate the value of the forward contract:

Value of the forward contract = $222.05 - $190 = $32.05

But since the spot price is lower than the forward price, the value of the forward contract would be negative.

Therefore, the value of the forward contract today is -$16.76 (option A).

Suppose You Bought a Forward on January 1 That Matures