Question

A long forward contract that was negotiated some time ago will expire in three months and has a delivery price of $20. The current forward price for a three-month forward contract is $21. The three-month risk-free interest rate is 8%. What to the nearest cent is the value of the short forward contract? A) -$1.85 B) $2.00 C) -$0.98 D) $0.98

Answer 1

Here, 

Delivery Price (K) = $20

Forward Price (F0) = $21

Risk free interest rate (r) = 0.08

Time (t) = 3 months or 0.25 years

\( \begin{align} \rm\text{Price of short term forward contract} &= (K-F0) \times e^{-rt}\\ &= ($20-$21) \times e^{-0.08 \times 0.25}\\ &= -$0.98 \end{align} \)

So, the price of the forward contract is -$0.98. So option C would be correct.

The answer is option C