Three months ago a company entered in a one-year forward contract to buy 100 ounces of gold. At the time, the one-year forward price was USD 1,000 per ounce. The nine-month forward price of gold is now USD 1,050 per ounce. The continuously-compounded risk-free rate is 4% per year for all maturities and there are no storage costs. Which of the following is closest to the value of the contract?
A. USD5,000
B. USD 4,852
C. USD 7,955
D. USD1,897
Answer:B
The forward price is computed as follows:
F0= 100× (F0-K)e- rT
F0 =1,050
K = 1,000
r = 0.04
T = 0.75
F = 100×(1050 — 1000)e-0.04*0.75= 4852