An off-market forward contract is a forward where either you have to pay a premium or you
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?
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
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 the full answer
Answered By
Faraz Sufyan
I am completing an MBA in General Management from KSBL, and have a BE in Petroleum from NED University. I have passion for innovation and teaching and encourage students to ask as many questions as they can to gain clear understanding. In addition to this, I am also serving as a Lecturer at the University of Karachi and have been teaching to students of O levels, A levels, Undergrads for the last 7 years, and my expertise include: Physics, Statistics, Business Math, Geology, Economics, Chemistry, Marketing and Management.
0 Reviews
10+ Question Solved
Related Book For 
Question Posted:
