I’m using CFA Institute Textbook to study derivative.
And on page p376 there is a question I couldn’t understand. Here is the question:
Troubadour next considers an equity forward contract for Texas Steel, Inc. (TSI). Information regarding TSI common shares and a TSI equity forward contract is presented in Exhibit 2.
Exhibit 2 Selected Information for TSI
The price per share of TSI’s common shares is $250.
The forward price per share for a nine-month TSI equity forward contract is $250.562289.
Assume annual compounding.
Troubadour takes a short position in the TSI equity forward contract. His supervisor asks, “Under which scenario would our position experience a loss?”
6 The most appropriate response to Troubadour’s supervisor’s question regarding the TSI forward contract is:
A a decrease in TSI’s share price, all else equal.
B an increase in the risk-free rate, all else equal
C a decrease in the market price of the forward contract, all else equal.
For answer B, I thought the formula for the value of short position in the equity forward contract is:
Vshort = PV(F0(T) - Ft(T) / (1+Rf)^(T-t)
So if risk-free rate increases, the value of the short position should decrease?
Am I not considering other aspects?
Could anyone help on this issue? Thanks!