A SHORT forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract?

a. +$2.00
b. -$2.00
c. +$1.96
d. -$1.96

-$1.96

Explanation:

A future contract is defined as an agreement to make a purchase at a certain time in the future at a particular price.

While present contract is executable immediately.

In this scenario if we want to negotiate today the price of the contract will be $40, while if we negotiate a forward contract for 3 months it will be $42

Therefore value of contract is present value of 40 - 42= -$2

It is given

Rate= 80%= 0.08

Time= 3 months= 3/12= 0.25 years

The present value can be calculated as

Value of present contract= -2e^(0.08* 0.25)

Value of present contract= -$1.96

answer(d) all of the choices are correct;