# basic Forward question

pg. 47 of study session 16. 4D

A security is worth \$225, wants to purchase asset one year from now. Rf is 4.75%

Price of forward = 235.69

Question D: The price of the asset is \$190. Calculate the value of the forward contract at expiration.

Value = Spot - Price of forward

Value = 190 - 235.69 = -45.69

• a gain of asset of \$35…(225-190)

Net loss = -10.69

My question: Why is there a gain of asset? Do I just assume that you sell the asset in the beginning? If so wouldn’t you invest the proceeds at the risk free rate and make this entire thing more complicated? Maybe someone just needs to explain to me the sequence of events that is making this happen as if this were actually you.

I think this is a terrible question since it’s so unclear.

I believe the point the CFAI wants you to understand is the opportunity cost, i.e. what is saved given you purchase later at a lower price.

It’s just when I did the calculation, I got the -45.69. I got that. But they throw in this gain of asset.

But if you wanted to purchase this asset in one year and are afraid that the price will rise (just like the question states), wouldn’t you just go long the forward and that’s it? I just don’t know my train of thought that would lead me to think of a gain of asset after seeing that question.

That’s why it’s a terrible question.