Suppose that the current market price of a financial security is $225. An investor plans to purchase this asset in one year and is concerned that the price may have risen by then. To hedge the price risk, the 2 investor enters into a forward contract on the asset in one year. Assume that the risk-free rate is 4.75 percent.

A. Calculate the appropriate forward price at which this investor can enter into the contract. Which position will the investor take, long or short?

B. Four months into the contract, the price of the asset is $250. Calculate the gain or loss that has accrued to the forward contract that the investor holds.

C. Assume that eight months into the contract, the price of the asset is $200. Calculate the gain or loss on the forward contract that the investor holds.

D. Suppose that at expiration, the price of the asset is $190. Calculate the value of the forward contract at expiration.

E. Now calculate the value of the forward contract at expiration assuming that at expiration, the price of the asset is $240.

Answer rating: 100% (QA)

A The investor shall take long position Forward price in ... View the full answer