Suppose that a firm entered into one short forward contract on crude oil at $50 per barrel

Finance Nov 03, 2020

Suppose that a firm entered into one short forward contract on crude oil at $50 per barrel. Currently, the forward is trading at a price of $45 per barrel. If the remaining time to maturity is 3 months, what is the value of the forward contract to the firm if the 3-months continuously compounded interest rate is 4% per annum?

Select one:

a. 5.05

b. -4.95

c. 4.95

d. -5.05

Expert Solution

Profit = Short selling price - Current Price

= 50 - 45 = 5

Value of contract when 3 months are remaining to maturity = Profit * e^(rate*0.25)

= 5*e^(0.04*0.25)

= 5.05 Answer

The first option is correct.

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