Discounted cash flow analysis and derivative pricing

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Reference no: EM131859877

Assume that a financial asset exists whose current (spot) price is St. This asset pays no dividends. A forward contract on this asset exists with expiration at date T. The price of this forward contract today is Ft. The price of the spot asset (and therefore the forward contract) at expiration can be written as ST.

(a) If I ”buy” one forward contract today, what is the payoff on the forward contract at date T?

(b) Write down the discounted value of the components of the payoff in part a). Set this discounted value equal to the amount of money which changes hands at the purchase of a forward contract, and solve for the forward price.

Reference no: EM131859877

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