Question

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?


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  • CreatedAugust 12, 2015
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