a) Let VK(t, T) be the value of a forward contract on an asset with delivery price K, VK(t, T) = (F(t, T) − K)e −r(T −t) . a) Verify that VK(T, T) equals the payout of a forward contract with delivery price K. For an asset that pays no income, substitute the expression for its forward price into the above equation and give an intuitive explanation for the resulting expression.b) Suppose at time t0 you go short a forward contract on an asset that pays no income with maturity T (and with delivery price equal to the forward price). At time t, t0 < t < T, suppose both the price of the asset and interest rates are unchanged. How much money have you made or lost? This is sometimes called the carry of the trade.

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Asked Sep 26, 2019
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a) Let VK(t, T) be the value of a forward contract on an asset with delivery price K, VK(t, T) = (F(t, T) − K)e −r(T −t) . a) Verify that VK(T, T) equals the payout of a forward contract with delivery price K. For an asset that pays no income, substitute the expression for its forward price into the above equation and give an intuitive explanation for the resulting expression.

b) Suppose at time t0 you go short a forward contract on an asset that pays no income with maturity T (and with delivery price equal to the forward price). At time t, t0 < t < T, suppose both the price of the asset and interest rates are unchanged. How much money have you made or lost? This is sometimes called the carry of the trade.

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Expert Answer

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Forward contracts are agreements where one party agrees to buy a commodity at a particular price on a specific future date and the other party agrees to make a sale.

Goods are actually delivered under forward contract. Business firms enter into forward contracts. ...

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