Question

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In October 2018, an investor entered a short position in forward on crude oil for delivery...

In October 2018, an investor entered a short position in forward on crude oil for delivery in October 2021. At that time, the spot price of crude oil was $70 per barrel and the risk-free rate of interest was 2% per annum. Currently, in October 2020, the spot price of crude oil is $40 per barrel and the risk-free rate of interest is 1% per annum. What is the value of the short position in the forward?

A)30

B)32.78

C)33.59

D)33.93

Solutions

Expert Solution

price of forward contract = spot price * ert

where r = risk free rate

t = time to maturity in years

Price of forward contract in October 2018 = $70 * e0.02*3 = $74.33

Price of forward contract today = $70 * e0.01*1 = $40.40

As it is a short position, it will profit if the price of the forward contract declines.

value of the short position in the forward =  $74.33 - $40.40

value of the short position in the forward =  $33.93

jeff jeffy answered 2 years ago
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