Practice problem - Reading 47

I think there is a mistake in Solotuion of question 4D in Practice problem. Summary:: a security = $225 at present , want to purchase after 1 year, r = 4.75% => Long a forward contract priced at 235,069. At expiration, that security = $190. => Gain or loss ?

Solotuion: Position loss 45.69 -> ok Gain on asset = 225-190 = $35 ??? Overall loss: -$10.69 ???

I really don’t understand why there is a gain 225 - 190 = $35 ? Have to pay 235.69 for a security only 190 after 1 year and the overall loss is $10,69 ? Notice that $10,69 is the result of 225 * 4.75% which mean $10,69 is just a interest. If use the same logic, whatever the price is the investor always gets overall loss $10,69 ?

has been discussed multiple times before.

no there is no mistake

use the search function for this same problem …

Used search function but can’t find the final answer. No one can explain clearly, just making more assumption. I think you can’t answer this question too.

I’m still half way through Econ but you got me all curious. I wish I could’ve helped but it seems like everyone is a bit confused by this Question. I guess that you have to take it as is, you have about 54 Qs of topic based practice on the web, so move on and focus on that, the Q&As over there tend to be more straight forward and phrased more accurately.

Good Luck!

It’s a gain of 35 as you delayed the purchase of the cash asset from when it was 225 until it was 190…so in effect you got it for a price that was cheaper by 35 dollars.

Simple as that I believe. It’s slightly confusing as how can you “gain” from something that you didn’t trade…but it’s semantics. You profited by 35 dollars by delaying purchase.

Its the same idea of profiting from a futures trade when you didn’t actually outlay any investment (bar margin etc) to enter into the futures trade.

agreed with S66.

for me i am try to look at 2 side --> simple way : Long Contract, Short Asset.

1). Long contract : loss 45.69 -> ok (you already understand)

2). Short Asset : from 225 to 190 (gain 35)

Net Loss : -10.69

Now please try question 4E (it is the opposite).

my background : Fail on CFA L2 2015, but managed to made FRA,Equity,Quant,Derivatives > 70%

I think the key here is: “the investor plans to purchase the asset in one year.” The FRA is just to hedge that. Therefore the decomposiion of return is hedging return (-45) + asset return (35) = -10 net loss.