Reading 58 first question offmarket forwd answer wrong long, first, valuation, question, contract

ikoreaii

the spot price 1000, forward price 1100/(1.0657)=1032, valuation is -32. obviously, short the forward make gain, thus for this offmarket forward contract, payment should be from long to short, not from short to long

thommo77

I just tried typing it and it was taking too long. Here’s some comments on the problem:
1) your method of calculation is correct (except you used the wrong interest rate.)
2) when you get to the final figure it will be positive or negative.
3) deciding who gains or loses from the figure in #2
a) your way is correct only when doing valuations when the forward contract IS IN EFFECT
b) if it’s a problem like this dealing with an off-market forward contract that IS NOT IN EFFECT, go opposite of what you normally do.
If you’re still looking for more explanation, leave your e-mail. I can draw some diagrams or something and it’ll be easier for you to see what i’m talking about.

ikoreaii

this payment is made up front. So the short will pay to the long ????
why??? can you explain?

amqata

In regards to the payment:
1) this payment is made up front. So the short will pay to the long
2) if it was at maturity, long to short

MonkeyBusiness

I think you might be wrong on this one:
1) your calculation uses an annual rate of 6.57%
2) the problem states an annual rate of 6.75%