In the solution to the forward contract it is mentioned that ‘ the contract will be repriced at $104 (1.05)9/12 = $107.876, and the two parties will mark to market again at the 6 month point.’.
I have the following two open questions.
Why is the repricing being calculation, F price once fixed at the initiation would continue to the end of the contract
How do I understand the math if a repricing of a forward is to be calculated?
Can anyone please help me understand how this has been worked out.
By payment netting, each party settles the outstanding gain/loss on the contract, which reduces current credit risk. The forward contract is then repriced by determining the future value of the spot rate at settlement. This obviously doesn’t happen very often in your typical forward contract questions. Both parties may have agreed to payment netting before entering into contract so as to reduce credit risk. Any problem on the CFA exam should explicity state if both parties plan to engage in some form of payment netting over the life of the contract.