Question

In October 2018, an investor entered a short position in forward on crude oil for delivery
in October 2021. At that time, the spot price of crude oil was $70 per barrel and the
risk-free rate of interest was 2% per annum. Currently, in October 2020, the spot price
of crude oil is $40 per barrel and the risk-free rate of interest is 1% per annum. What
is the value of the short position in the forward?

Answer 1

Value of the forward contract (for long) in between the initiation and the expiration is the difference between the Current spot and the present value of the forward price.

In this case,

S= 40

F(t) = 70

Rf=0.01 remaining period is 1year

Therefore, value today= 40-(70/0.01) = $-29.30. i.e negative value for a long position .

Hence, the value of short is at profit $29.30.

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