In: Finance
Suppose that we entered a long position of 3-year forward on crude oil six months ago, when the forward price was $30 per barrel. Now, the spot price of the crude oil is $25 per barrel and the risk-free rate is 2% per annum. What is the value of the long position?
Forward price now =spot price *(1+ risk free interest) ^time
Given,
Spot today =25
Interest rate =2% per annum
Timr to expiry =2.5 years
Hence,
Forward price today =25*(1+2%)^2.5
=25*1.05075
=26.26875
Value of long position = (price of forward today - price at the time of purchase of forward)
=26.26875-30=-3.73125
Hence value of long position =-3.73125 after 6 months
(it is assumed that interest rate are not continously compounded but at compounded annually)