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A short forward contract that was negotiated some time ago will expire in six months and...

A short forward contract that was negotiated some time ago will expire in six months and has a delivery price of $150 (agreed upon price at inception). Today’s forward price for a six-month forward contract on the same underlying is $173. The six month risk-free interest rate (with continuous compounding) is 5% per year. What is today’s value of the short forward contract?

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Answer #1

If the spot price of the forward contract is "S", the Forward (Delivery) price is "F", the time duration till settlement "T", and the risk-free rate of interest "r", the value of forward contract "V" is calculated as:

V = S - [ F / { (1+r)^T } ]

i.e. the difference between spot price of the forward contract and the present value of the forward price.

Plugging the above values for S = $173, F = $150, r = 5% and T = 0.5, we get the value of V:

V = 173 - [ 150 / { (1.05)^0.5 } ] = $26.6

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