Query - Value of Forward Contract

[Avishek]

Hi David

Hope you are keeping fine and setting up our CRAM Sessions?

In your Derivatives I video under Section "Question Value Forward Contract" at 1:56 Minutes, can you advise me as to why we haven't take the Exponential power as negative as per your formula?

Please advise if there is a relation with the Delivery Price lesser/greater than the Spot Price. Thanks in advance.

Cheers, Avi

 

[David Harper CFA FRM]

Hi Avi,

Sorry, as others have noted, it is a mistake. You are absolutely correct: =EXP(-rate * time) to discount to the present value.

Does that negate your second question? In this case, the value of the forward, I would say: no, the formula does not change depending on whether the delivery is greater/lesser than the spot price. The forward formula wants the delivery price (F0). You just may need to solve for the F0, if it is not given, using the cost of carry model.

Thanks for encouragement on the CRAM session...yes, I am working on it, I am going for maximum density - it could be painful, but i hope it a good way

David

 

[Bruno]

Hi David,

On page 22, there is an example of the value of a forward contract. I believe that there might be a mistake.

If you want to use the first formula, the forward price seems correctly calculated (F= 10.126). However, in the second
part of the exercise, e should be power to the (-5%)(0.25) and the result is 2.099.

f=(F - K)e^(-5%*0.25)= (10.126-8)e^(-5%*0.25)=2.12578e^(-5%*0.25)=2.09938

Alternatively, you can use the second formula (that is provided at the top of the page) and because it is a non dividend-paying stock, S*e^(-q*T) = S*e^(-0*T) = S * 1 = S


f= Spot - 8e^(-5%*0.25)
f= 10 - 8e^(-5%*0.25)= 10 - 7.90062 = 2.09938

Thanks again for your help.

 

[David Harper CFA FRM]

Hi Bruno,

I agree, thanks for spotting this. I will update this. Thanks! David