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Basic Question 4 of 7
John has an asset that is worth $110. He plans to sell it in 8 months. The risk-free interest rate is 4.5%. Suppose the forward contract is entered into at $113.28, and the price of the underlying asset is $109 at expiration. What is the rate of return for John?
User Contributed Comments 6
| User | Comment |
|---|---|
| PhiWong | Another way to look at it is: Since John already long the foward, he is lock in for the selling price and therefore his rate of return would be precisely the risk-free rate. |
| PASS0808 | John's return =value of the contract +return of holding the asset =-(109-113.28)+(109-110)=113.28-110=3.28 |
| HenryQ | It is better to keep the 109 out of the pictures here...it does not matter what future spot price is...it can be 104, 105, anything...it does not impact the return as it is already locked in by the contract... |
| vi2009 | As long as the forward contract is entered at the arbs-free price, the rate of return is the RF rate. |
| mchu | good question |
| Shalva | Yes, useful tip to remember - if locked to no-arbitrage price, you'll earn only RF return |
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Learning Outcome Statements
explain how the value and price of a forward contract are determined at initiation, during the life of the contract, and at expiration
CFA® 2024 Level I Curriculum, Volume 5, Module 5.