Question

Value of a Forward contract at an
intermediate time
Suppose we hold a forward contract on a stock with
expiration 6
months from now. We entered into this contract 6
months ago so that when we entered into the
contract, the expiration was T = 1 year. The stock
price$ 6 months ago was So = 100, the
current stock price is 125 and the current interest
rate is r = 10%
compounded semi-annually. (This is the same rate
that prevailed 6 months ago.) What is the current
value of our forward contract?
Please submit your answer in dollars rounded to one
decimal place so if your answer is 42.678 then you
should submit an answer of 42.7.​

Answer 1

Answer:

The fair future value of a stock (with interest compounding semi-anually) is

F = S * (1+r/2)^(2t)

The fair future value when you purchased the forward was:

100 * (1+0.05)^2 = 110.25

The current fair value of the forward that expires in 6 months is

125 * (1+0.05)^1 = 131.25

So the current value of the forward is

131.25 - 110.25 = 21

Explanation:

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