# Question: An off market forward contract is a forward where either you

An off-market forward contract is a forward where either you have to pay a premium or you receive a premium for entering into the contract. (With a standard forward contract, the premium is zero.) Suppose the effective annual interest rate is 10% and the S&R index is 1000. Consider 1-year forward contracts.

a. Verify that if the forward price is $1100, the profit diagrams for the index and the 1-year forward are the same.

b. Suppose you are offered a long forward contract at a forward price of $1200.

How much would you need to be paid to enter into this contract?

c. Suppose you are offered a long forward contract at $1000. What would you be willing to pay to enter into this forward contract?

a. Verify that if the forward price is $1100, the profit diagrams for the index and the 1-year forward are the same.

b. Suppose you are offered a long forward contract at a forward price of $1200.

How much would you need to be paid to enter into this contract?

c. Suppose you are offered a long forward contract at $1000. What would you be willing to pay to enter into this forward contract?

**View Solution:**## Answer to relevant Questions

Suppose that you buy the S&R index for $1000, buy a 1000-strike put, and borrow $980.39. Perform a payoff and profit calculation mimicking Table 3.1. Graph the resulting payoff and profit diagrams for the combined position. Suppose you buy a 950-strike S&R call, sell a 1000-strike S&R call, sell a 950-strike S&R put, and buy a 1000-strike S&R put. a. Verify that there is no S&R price risk in this transaction. b. What is the initial cost of the ...Construct a spreadsheet for which you can input up to five strike prices and quantities of put and call options bought or sold at those strikes, and which will automatically construct the total expiration payoff diagram for ...If XYZ does nothing to manage copper price risk, what is its profit 1 year from now, per pound of copper? If on the other hand XYZ sells forward its expected copper production, what is its estimated profit 1 year from now? ...Consider the example of Auric. a. Suppose that Auric insures against a price increase by purchasing a 440-strike call. Verify by drawing a profit diagram that simultaneously selling a 400 strike put will generate a collar. ...Post your question