Forecast valuation derivative in DCF

CFA Level II Equities
#1

I’m doing a DCF calculation but how can I forecast financial derivatives? It currently has a fair value of -100. And -50 of this fair value expires next year, and -50 expires the year thereafter.

How can I forecast this, can I just discount the -50 cash outflows?

Thanks.

#2

you need to forecast the payoff of the derivative, then discount this value.

for instance, lets say you are long 10 barrels of oil at 90 that expires in 1 year. if you think spot oil in 1 year will be 100, then the contract will be $10 in the money and your payoff in 1 year will be $100, (10 bbls * $10).

This payoff is what you need to discount in your DCF, not the current fair value.

#3

Sorry I think I was not really clear with my question.

The derivative is on balance… so I have to forecast the balancesheet ;).

It’s valued at fair value… how would you forecast it ?

thanks!