From Kaplan:
I have struggled with understanding the Derivatives module. Likewise, I do not see this formula on my Kaplan QuickSheet. Why does the answer consist of S-F as the numerator?
In a nutshell, the value of a derivative is the present value of what you will receive minus the present value of what you will pay. Typically, when CFA Institute asks about the value of a derivative, they mean the value from the standpoint of the long position; the value to the short position will be the negative of that.
Here, the present value of what the long position will receive is today’s spot price: if you owned the underlying asset and sold it today, that’s what you’d receive. The present value of what you will pay is the agreed forward price discounted back to today at the risk-free rate.
Voilà!
Thank you for making it short and sweet.
Your explanations parallel that of Einstein’s quote; “Everything should be made as simple as possible, but no simpler”.
My pleasure.
High praise; thanks.