Suppose that we entered a long position of 3-year forward on crude oil six months ago,...

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?

Solutions

Expert Solution

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)

jeff jeffy answered 1 year ago

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