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.

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?

Step by Step Solution

★★★★★

3.58 Rating (166 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a If the forward price is 1100 then the buyer of the oneyear forward contract receives at expiration after one year a profit of S T 1100 where S T is ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

511-B-C-F-O (414).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

How much interest will you have to pay for a 60-day loan of $500, if a 36% annual rate is charged?

How much would you need to invest today in order to have a total of $200,000 in 20 years from now if your funds earn a. 3.6% compounded annually? b. 3.6% compounded monthly?

How much would you need to invest today in order to receive a monthly payment of $500 for 3 years. At the end of the three years there will be nothing left in the investment. This investment will...

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.)...

2.9 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...

9. 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.)...

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.)...

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)....

Wrae Test Number Merge Center You are selling mopeds to China. The importer owes you Yuan 6,000,000. It is due in 90 days. If US interest rates and your cost of capital are the same as above and the...

Lululemon - Quality control issues leading to product recalls.explain the Supply Chain & Operations of the Organization The problem in detail, how it originated or occurred, what Actions the company...

Below is another motion diagram for an object that !roves along a linear path The dots represent the position of me object at five subsequent instants. t 1, t 2, t 3 , t 4 . and t 5 . The vectors v?...

function out 1 = examQuestion ( in 1 , in 2 ) % Assume that in 1 and in 2 are the same size [ m , n ] = size ( in 1 ) ; out 1 = zeros ( m , n * 2 ) ; for i = 1 : 1 :m for j = 1 : 1 :n if in 2 ( i , j...

12.34 Aqua Systems Engineering provides consulting services to city water authorities. A recent income state- ment revealed variable costs of $740,000 on a sales level of $1,000,000. Annual fixed...

Suppose the 1-year copper forward price were $0.80 instead of $1. If XYZ were to sell forward its expected copper production, what is its estimated profit 1 year from now? Should XYZ produce copper?...

Use the same assumptions as in the preceding problem, without the bid-ask spread. Suppose that we want to construct a paylater strategy using a ratio spread. Instead of buying a 440-strike call,...

Using the information in Table 4.11, verify that a regression of revenue on price gives a regression slope coefficient of about 100,000.

USE THE FOLLOWING DATA TO ANSWER QUESTIONS Annual Income Statements 2013 2014 Sales 500,000 560,000 COGS ???? 149,350 Gross profit 380,000 410,650 Oper. exp 225,000 250,100 Depreciation 15,000 15,000...

21. Write a line of code that will change an applet's background color to red. 22. Write a line of code to print each of the following in the command prompt window: a. your name b. a previously...

Times for a surgical procedure are normally distributed. There are two methods. Method A has a mean of 21 minutes and a standard deviation of 5 minutes, while method B has a mean of 25 minutes and a...