Question

9. The current euro exchange rate is $1.10 (dollar price of euro). Assume zero interest rates for both currencies. If you are long 100 contracts of 2-yr forward contracts on euro with a delivery price (K) of $1.20, what will be the current value of your forward position?

Answer 1

At any point of time T

The value of the forward contract is computed by the following formula

Value of the contract = (St- Ft/(1+r)^N)* no of the contracts

Here St means spot price

Ft means the future price

r is the interest rate and n is the time period

SInce in the present case there is no interest rate

Therefore the value of the forward contract will be (1.10-1.20)*100 = 0.10*100 =10

Generally we have to account for the effect of the interest rate and the time period for the correct computation of the value of the forward contract