I thought I had this pretty solid. The value formulas are from the perspective of the long position (asset price - PV of excercise price) so a positive value is a gain for the long.
However EoC #1 asks who pays whom on the contract (negetive value). The answer says ‘Because the value is negetive, the short pays the long’
Now Im completely lost and there are no errata logged for the question. Can anyone explain how these two descriptions do not contradict each other?
Edit: I went through the rest of the problems with the logic: “positive value is a gain for the long” and had no other problems. Hopefully Im misreading it/missing a trick since the question was written in 2003 haha
Reread the question: this is an off-market forward. The value at inception is −$30.44; thus, long owes short $30.44. The only way that long can owe short at inception is that short has paid long that amount.
Without seeing the question, it sounds like it might be referring to an asset’s initial pricing, where (if we’re assuming standard persepective of the long party) the long pays any positive value, the short pays any negative value, and the inital price is not set to arbitrage-free value. These are ‘up-front’ expenses at t=0 to allow for tailored cash flows without compromising implied risk-return, known as an ‘off-market forward’ contract. I could be far off here though.