## Forward contact

devinarastogi84
Good Student
Posts: 22
Joined: Thu Apr 17, 2014 9:40 pm

### Forward contact

The current spot price for iron is \$0.485/pound. The annual risk-free rate is 4.5% and the cost to store and insure iron is \$0.008/pound/month. A 3 month forward contract for iron is trading at \$0.524/pound. What will be the amount of profit that an investor is getting by selling contracts?
Select one:
a. \$0.004/pound
b. \$0.008/pound
c. \$0.006/pound
d. \$0.001/pound
Feedback

The Forward price = 0.485e0.045×0.25 + (0.008 + 0.008 × 1.00375 + 0.008 × 1.003752) = \$0.520/pound
So investor will get the profit by selling a forward contract = 0.524 – 0.520 = \$0.004/pound

My question is how do we calculate r for storage cost , in above question r used is .00375. how we got this value?

pristine
Posts: 5
Joined: Wed Apr 03, 2013 9:45 pm

### Forward contact

Hi Devina,

Please kindly provide us with the source/reference of this query.
Thanks

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