If forward price > K (delivery price) and we are long, then V>0 and if fwd price < K while we are long, then V<0.

CFA Level II Derivatives
#1

I am not getting the logic behind it, can someone simplify this.

#2

forward price > K (delivery price) and we are long, then V>0

Example is extreme and made up.

You entered into a contract today to pay $20 for say an ounce of gold in 1 months time. In 1 month’s time - whatever be the price of an oz. of gold you will ONLY pay $20. If the actual price of gold is say a $100 per oz. then - you still would pay $20. So your value due to the forward contract is > 0.

If however the price of gold were $15 - you would still have to pay $20 due to your contract - and you would lose (your V < 0).

#3

Thanks i got it

#4

But in the first part of example actual price is $100 so isn’t it K>forward price?

#5

sorry ignore my comment … not thinking straight - and not able to put my finger on it …

#6

Oh yeah i remembered that Forward price is related to spot price F0=S0e^rT, where as K is what we’ll pay to but the asset at that time