Question

Why is the value of a forward contract at the time of its origination equal to...

Why is the value of a forward contract at the time of its origination equal to zero?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer-

Forward contracts have an initial value of $ 0 because in the initial agreement of the contract there is no money that changes hands which means that no value can be attributed to the contract initially and therefore it has no intrinsic value at the origination or inception of contract.

The forward contracts are not required to make any initial or down payment unlike some future contracts and is therefore equal to zero at origination or inception.  

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Why investment use both swap and forward contract while international trade us only forward contract
Why investment use both swap and forward contract while international trade us only forward contract
A SHORT forward contract that was negotiated some time ago will expire in one year and...
A SHORT forward contract that was negotiated some time ago will expire in one year and has a delivery price of $50. The current stock price underlying this forward contract is $40. The risk-free rate with continuous compounding is 8% for all maturities. This stock pays dividend payment of $3 each in 3 months and 6 months, respectively. What is the value of this forward contract?
A futures contract is more flexible and liquid than a forward contract. Explain why.
A futures contract is more flexible and liquid than a forward contract. Explain why.
A futures contract is more flexible and liquid than a forward contract. Explain why.
A futures contract is more flexible and liquid than a forward contract. Explain why.
A short forward contract on an investment asset that yields 7.7% and was negotiated some time...
A short forward contract on an investment asset that yields 7.7% and was negotiated some time ago will expire in 1 months and has a delivery price of $60. The current spot price of the commodity is $63. The risk-free interest rate (with continuous compounding) is 1.8%. What is the value of the short forward contract? An investor shorts 178 shares when the share price is $78 and closes out the position 10 months later when the share price is...
A one-year long forward contract on Amazon is entered into when its stock price is $1,900...
A one-year long forward contract on Amazon is entered into when its stock price is $1,900 and the continuous compounded interest rate is 2.5%. (Note: Does Amazon pay dividends?) a) What are the fair forward price and the initial value of the forward contract? b) If the forward price is set at $1,950, how would you arbitrage it? c) Six months later, the stock price of Amazon rises to $2,000. What are the current fair forward price and the current...
What is the value of an index forward contract 2 months prior to its expiration from...
What is the value of an index forward contract 2 months prior to its expiration from the SHORT position's view, if the index's level is 313 and the forward's agreed upon price is 307? You also know that the log risk free rate is 4% and the index's log dividend yield is 2%
Is there any cash payment upfront in a futures or forward contract? Explain why.
Is there any cash payment upfront in a futures or forward contract? Explain why.
Compute the mark-to- market value of the following long forward NZD (New Zealand Dollar) contract. The...
Compute the mark-to- market value of the following long forward NZD (New Zealand Dollar) contract. The size of the long position is NZD 450,000 and the forward rate is Fn USD/NZD= 0.66; the current spot rate (at time of valuation) X0 USD/NZD= 0.64. The NZD and USD interest rate are: rNZD= 9% and rUSD= 3%; assume the contract matures in two years from now (so at t=2). Please calculate the forward price and mark to market value.
Assume that there is a forward market for a commodity. The forward price of the commodity...
Assume that there is a forward market for a commodity. The forward price of the commodity is $45. The contract expires in one year. The risk-free rate is 10%. Now 6 months later, the spot price is $52. What is the forward contract worth at this time? Explain why this is the correct value of the forward contract in 6 months even though the contract does not have a liquid market as a futures contract does.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT