Question #64
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 26
Status: Unattempted
Question
During the life of a forward contract, the value of the contract is best described as:
Answer Choices:
A. the difference between the spot price and the present value of the forward price of the underlying asset
B. the difference between the future value of the spot price and the expected future price of the underlying asset
C. the present value of the expected future price of the underlying asset
Explanation
The value of a forward contract on an asset with no cash flows during its term is equal to
spot − (forward price) / (1 + Rf)t), the difference between the spot price and the present
value of the forward price of the underlying asset.