Schweser Forwards contract, examples, regarding

grharmeyer

has anyone else using Qbank noticed any contradictions in the qbank answers regarding forward contracts? This was pretty frustrating for me as I was going through. Here are two examples I've found...(note: i'm primarily using schweser for studying and maybe I should use CFAI for this section).


The price of a forward contract:

a: is determined at contract initiation

I've also had the exact same question asked and the answer was:

is the settlement price for the underlying asset. (the explanation also says that this is the difference between settlement price and forward contract price)

I'm having a difficult time understanding how both of these are correct. At initiation no cash changes hands (easily understandable). but wouldn't the price not be able to be determined until settlement (when cash actually does exchange hands)?

The text talks about valuing forward contracts prior to settlement but that is a "value" not a price paid to or by either party prior to settlement. I'm viewing price as a "transaction price" or a cost to the seller/purchaser at settlement. I must be wrong in my perspective. Can anyone help demystify this concept for me?

Kapie

derivatives! stay away from me!!

MiniMe7

Have you read about off-market forwards?

kickthatcfa

Chuckrox08 - I haven't read anything about off-market forwards...how is that different than a "vanilla" forward?

stingreye - I'm no more confused than I was when I started. I see the point you are trying to make, but I'm still a little confused. After thinking about it for a while I think the question was pretty poor on schweser's part. There should have been some distinction between the two questions.

edit: the only other conclusion I could come to was that one of the questions was actually referring to the "forward price" which is determined at initiation.



Edited 1 time(s). Last edit at Monday, May 9, 2011 at 08:32PM by ClayParks.