Simple forward question - pls help

S0 = 1000 1 yr forward price = 1100 rf = 6.75% 1) If you are long the forward, would you get paid, or would have to pay on settlement date? and what value. 2) To profit by arbitrage, can you explain the steps.

sell the forward its overpriced (agree to sell the asset at that price in the future). borrow some cash at 6.75% and buy the asset. at expiration, deliver the asset for 1100 to some chump. use the 1100 to pay back 1,067.50 you owe. You just made a clean 32.50 by sittin on your arse…

1. If you are long the forward, would you get paid, or would have to pay on settlement date? and what value. Long means buy. You’ve made a deal to buy in 1 year at 1100. 2) To profit by arbitrage, can you explain the steps. see pistol petes post

deepstack: if i rephrase the queston, what would you say indicate a payment is made by the long to the short or vice versa?

Just like they said above, but here take it in simple terms. IBM = \$1000 1 yr forward price = \$1100 rf = 6.75% Someone is offering to sell you IBM for \$1100 in one year, or you sell him IBM for \$1100. When you calculated tyhe forward price, you discovered IBM should be at \$1067 in 1 year. So, would you buy it at \$1100 or sell it at \$1100 a year later? Naturally you will not want to buy it at \$1100, so you better sell it. Enter into contract with the guy. But remember this with all arbitrage questions: You have *no* money on you at all. So, first go borrow \$1000 (and pay it back as \$1067 a year later). Buy IBM today at \$1000. Latre sell it to the idiot and collect \$1100. Pay back the loan + interest = \$1067, and walk away with \$32.5.