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Question

Compute the payoff to the long and short positions in a forward contract, given that the forward price is Rs 35 and spot price at the maturity is Rs 50

A Long =15, Short = 15 Correct Answer Incorrect Answer
B Long = 15, Short = -15 Correct Answer Incorrect Answer
C Long = -15, Short = -15 Correct Answer Incorrect Answer
D Long = -15, Short = 15 Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

Payoff to the long position will be positive when spot price is more than the forward price at the time of maturity. Similarly, payoff to the short position will be negative when spot price is more than the forward price at the time of maturity. Therefore: Payoff to the Long Position = Spot Price – Forward Price (50-35 = 15) Payoff to the Short position = Forward Price – Spot Price (35-50 = -15)

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