A long one-year forward contract on a productive asset was entered at a forward price of ₡1,000. Now, seven months later, the underlying asset is selling for ₡1,050. The PV of the cost to store, insure, and maintain the asset for the next 5 months is ₡4.00, and the asset will generate income over the next 5 months with a PV of ₡28.00. Assume annual compounding for all costs and benefits and a risk-free rate of 2%.

 Based on the current spot price and the no-arbitrage approach, what is the equilibrium five-month forward value?

Answer rating: 100% (QA)

To determine the equilibrium fivemonth forward value we can use the noarbitrage principle which stat... View the full answer