Question

A forward contract is sold at t = 0 with a forward price F0 = $200. Suppose the spot price (S0) at t = 0 is $175, and the settlement (expiration) day spot price is ST = $215. What is the value of the contract at settlement to the buyer of this forward? $25 $15 $0 −$15 −$25

Answer 1

Solution :

In the case of a forward contract:   

Since the spot price as on expiration date is more than the forward price, the value of the contract at settlement to the buyer of this forward calculated as follows:

= Spot price at expiration date - Forward Price

As per the Information given in the question we have

Forward Price = F0 = $ 200

Spot price at expiration date = ST = $ 215

Thus value of the contract at settlement to the buyer of this forward = $ 215 - $ 200 = $ 15 .

Thus the Solution is $ 15.