Question #31
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 13
Status: Unattempted
Question
At expiration, the value of a forward contract is:
Answer Choices:
A. always greater than or equal to zero
B. the difference between the contract price and the market value of the underlying asset
C. equal to the market price of the underlying asset
Explanation
In a forward contract, the long is obligated to buy, and the short is obligated to sell, the
underlying asset at the contract price. The difference between the contract price and the
market price of the asset is what gives the contract value. The contract has a positive value
at expiration to the long/short only if the contract price is below/above the market price.