Forwards question question

trogulj

Hey guys,

I'm new to the site and this is the only forum where I've seen people asking questions on the exam material and actually getting a response. This is what I hope to get out of this forum. Hopefully I'll be able to get some help and also give it to others. Anyways, onto my question:

Why is this true? I do not understand the following statement:

A short position in an equity forward could not hedge the risk of a purchase of that equity in the future.

A qualitative as well as a quantitative example would help a lot.

jcfa2011

This is one of the answers for a concept checker in CFA Level 1 Schweser Study Notes. Forget which page though...

JonnyKay Wrote:
-------------------------------------------------------
> Where'd you get this from?

kickthatcfa

OK thanks for the example. I think it makes sense now

mp3bu

Sorry for getting back to you guys late. Thanks for all the input!



Edited 1 time(s). Last edit at Friday, August 5, 2011 at 07:53PM by jonathankyim.

zbird2134

i forgot that your at Level I, so you may need the numeric example likeyou said

I short an equity forward on non div paying XYZ stock, expiration is in 1 month and forward price is 100$

the forward price is used to refer to the amount of money that must be paid at expiray

the spot priced is used to refer to the price of the equity at this moment

____

so in one month i will deliver stock XYZ and get 100$ in return, if its spot price at that time is 50$, i dontcare i still get my 100$

it the spot price is 200, i still only get a 100$

however my position has nothing o do with hedging a purchase, the person on the oposite side of thi transaction is the one hedged to purchase, that would be the person paying me 100

Carson

hummm, short means sell, I remember them via the S

so if you sold a forward you are obliged to deliver the equity at expiration.

so you are hedged against an undesirable sell price and not a purchase price.

helps ?

eoin

Where'd you get this from?