Question 6: The Value of A Forward Contract

This question asks you to think about how the value of a forward contract on a non-dividend paying stock changes over time. (1) On February 20 you enter into forward contract to buy ABC shares on December 20. ABC shares currently trade at $100. What is the forward price? (The continuously compounded interest rate is 10% and assumed to be constant for the whole calendar year.)

(2) On May 20, the price of one ABC share is $150. What is the forward price of a forward contract with delivery date December 20 (this is a different contract)?

(3) Forward contracts are not traded on an exchange, they do not have a market price. However, a reasonable way to define the value of a forward contract is as the amount of money someone would have to pay you today to give up your forward contract. Using this definition, what is the value of the original forward contract (that you entered into in February) on May 20? (4) Sometimes it is the case that you would be prepared to actually pay someone else for the right to walk away from a forward contract. In this case, the value of the forward contract is negative. Re-do part (iii) under the assumption that on May 20, the price of one ABC share is $50.

(5) What is the May 20 value of a short position in the original forward contract if the ABC share price on May 20 is $150? (6) What is the May 20 value of a short position in the original forward contract if the ABC share price on May 20 is $50? (7) What is the value of a long position in the original forward contract on February 20 (the entry date)?