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

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

Quizplus · Accepted Answer

The value of the forward contract to the buyer (investor) after two months, when the one-month forward price of oil is $83 and the contract price is $80, can be calculated as the difference between the market forward price and the contract price, multiplied by the quantity. Since the market price is higher ($83) than the contract price ($80), the contract has a positive value to the buyer. The calculation is (83 - 80) * 5,000 = $15,000. 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 $- \$ 15,000$