How much would you need to paid to enter into this contract

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Reference no: EM132187856

Question - An off-market forward contract is a forward where either you have to pay a premium or you receive a premium for entering into the contract. (With a standard forward contract, the premium is zero.) Suppose the effective annual interest rate is 10 % and the S&R index is 1000. Consider 1-year forward contracts.

(1) Verify that if the forward price is $1100, the profit diagrams for the index and the 1-year forward are the same.

(2) Suppose you are offered a long forward contract at a forward price of $1200. How much would you need to be paid to enter into this contract?

Reference no: EM132187856

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