Question

1. True or False: the forward price is the price the forward contract buyer needs to pay to the seller to enter the contract. Explain.

2. A trader enters into a SHORT position in a cotton futures contract when the futures price is 50 cents per pound yesterday. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose totally if the futures price at the end of today is

48.20 cents per pound;

51.30 cents per pound?

Answer 1

1. The given statement is TRUE, because the forward price is the price which will be paid by the buyer to the seller to enter into a contract and this price will be based upon the futuristic value of the contract and the delivery is also to be made on a futuristic date but the price will have to be paid today.

So, it can be said that, In the forward price agreements the pricing is to be paid today, but the delivery of the contract is made at a futuristic date, and it is a forward contract market which is done on over the counter exchange.

This type of contracts are entered into in order to protect from futuristic fluctuations of exchange rate or interest rate for receivables or payables.