Question

A few months ago, an investor went long a forward contract to purchase EUR 10,000 at a forward price of USD 1.25 per EUR. The contract still has 9 months to maturity. The current 9-month forward price of Euro is USD 1.20 per EUR, and the 9-month interest rate for USD is 3% per annum (continuously compounded). What is the present value of this forward contract to this investor

Answer 1

488.88

Step-by-step explanation:

In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivative instrument.

DATA

Interest rate = e = 3%

time = 9 months

F1 = 1,2

F0 = 1.25

euro to purchase = 10,000

The present value of this forward contract to this investor = (F1 - F0) x Euro to be purchased x e-r x t

The present value of this forward contract to this investor = USD (1.20 - 1.25) per Euro x 10,000 x 3% x 9/12

The present value of this forward contract to this investor = USD (1.20 - 1.25) x 10,000 x 3% x 9/12

The present value of this forward contract to this investor = - USD 488.88