Question #53
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 21
Status: Unattempted
Correct Answer: A
Question
At contract initiation, the value of a forward contract:
Answer Choices:
A. is typically zero regardless of the price of the underlying asset
B. is set to 100 by convention
C. depends on the market price of the underlying asset
Explanation
Due to the no-arbitrage principle, the price of a forward contract is calculated to make the
value of the contract zero at contract initiation. Neither the long nor the short typically
makes any payment to enter into the forward agreement. A special case is an off-market
forward where, for whatever reason, the contract price is not set equal to the no-arbitrage
price, and the long or short position makes a payment to the opposite counterparty to
offset the difference.