1. Consider a one-year forward contract established at rate of $105. The contract is four months...

Transcribed Image Text:

1. Consider a one-year forward contract established at rate of $105. The contract is four months into its life. The spot price is $108, the risk-free rate is 4.25 percent, and the underlying makes no cash payments. The two parties decided at the start that they will mark the contract to market every four months. At month 4, determine: a) the amount at risk of a credit loss; b) which party bears credit risk right before marking to market, long or short? c) new forward price and time to maturity when the contract is marked to market. In addition, how the cash flows and forward price resets would work? (Note: provide three sentences on marking to market as what we discussed in class.) 1. Consider a one-year forward contract established at rate of $105. The contract is four months into its life. The spot price is $108, the risk-free rate is 4.25 percent, and the underlying makes no cash payments. The two parties decided at the start that they will mark the contract to market every four months. At month 4, determine: a) the amount at risk of a credit loss; b) which party bears credit risk right before marking to market, long or short? c) new forward price and time to maturity when the contract is marked to market. In addition, how the cash flows and forward price resets would work? (Note: provide three sentences on marking to market as what we discussed in class.)

Answer rating: 100% (QA)

a To determine the amount at risk of a credit loss we need to calculate the difference between the f... View the full answer