Forward Contract

CFA Level II Derivatives
#1

Bill wishes to buy a security in 9 months thats currently worth $95. To hedge against the price going up he goes long on the fwd contract that expires in 9 months. Rf = 4%

The no arbitrage price is $97.84 = 95 (1.04 ^270/365)

If at contract maturity, the price of the asset is $100, the overall gain/loss to Bill on the entire transaction (spot & fwd) is…?

The book says its the gain on the fwd $100-97.84=2.16 and the loss on spot = 100-95 = -5

Total is -2.84 loss.

Why would the spot even be a factor here since he bought the fwd and did not sell short the stock. ??

#2

-5 is like an opportunity cost, an economic cost. What if he hadn’t entered into forward and had bought today at 95? His gain could have been 5 by now, but because of the forward it is only 2.16.

#3

Yup i was also thinking the same but if he doesnt buy at T0 he also gains by investing at 4% so what about that?

#4

That is reflected in the no-arbitrage forward value.