Answer-first summary for fast verification
Answer: USD 4,855
## Explanation To calculate the value of the forward contract, we need to find the present value of the difference between the current forward price and the original forward price. **Given:** - Original forward price (F₀) = USD 1,000 per ounce - Current forward price (F₁) = USD 1,050 per ounce - Quantity = 100 ounces - Time remaining = 9 months = 0.75 years - Risk-free rate = 4% per year (annually compounded) **Calculation:** 1. The value per ounce = (Current forward price - Original forward price) × Present value factor 2. Value per ounce = (1,050 - 1,000) × e^(-r×t) 3. Since it's annually compounded, we use: PV factor = 1/(1+r)^t = 1/(1+0.04)^0.75 4. PV factor = 1/(1.04)^0.75 = 1/1.0296 ≈ 0.9711 5. Value per ounce = 50 × 0.9711 ≈ USD 48.555 6. Total contract value = 48.555 × 100 = USD 4,855.50 The closest value is **USD 4,855** (Option B).
Author: LeetQuiz .
Ultimate access to all questions.
Three months ago a company entered in a one-year forward contract to buy 100 ounces of gold. At the time, the one-year forward price was USD 1,000 per ounce. The nine-month forward price of gold is now USD 1,050 per ounce. The annually-compounded risk-free rate is 4% per year for all maturities, and there are no storage costs. Which of the following is closest to the value of the contract?
A
USD 5,000
B
USD 4,855
C
USD 7,955
D
USD 1,897
No comments yet.