Question

The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. What is the profit or loss to a short position if the spot price of the market index rises to $920 by the expiration date?

Answer 1

$10

Step-by-step explanation:

The gain/(Loss) on the forward contract shall be determined through the following mentioned method:

Gain/(Loss) on forward contract=Price at which the the 3 month forward contract is priced-spot price of market index at the expiration of the 3 month period.

So based on the above formula, the gan/(Loss) shall be calculated as follows:

Gain=$930-$920=$10