Question

1. Explain the difference between the spot price of an asset and its forward price.

2. If you take the short position on a call option or put option what is the maximum payoff you can receive? What is the maximum profit you can make?

Answer 1

Spot price is the price at which goods or product is bought immediately and goods are delivered immediately. While forward price is the price at which contract is signed to have goods purchased at agreed price in future and delivered at a time in future.

For example, a wholesaler can buy orange juice at spot price in month of August from a seller and get the same delivered at the earliest. While thinking that price for orange juice will increase in month of December due to low supply, buyer will go in a forward contract with seller to have orange juice in December at price specified today.