## Derivatives-I

bhuyanpk
Good Student
Posts: 14
Joined: Sat Aug 08, 2015 12:12 pm

### Derivatives-I

If the net cost of carry of an asset is positive, then the price of a forward contract on that asset is most likely:
A.lower than if the net cost of carry was zero.
B.the same as if the net cost of carry was zero.
C.higher than if the net cost of carry was zero.

According to equation [S0+PV0(cost)-PV0(Benefit)] (1+rf)^t=F0T

answer should be C.Whereas it is given A.Pls explain

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edupristine
Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am

### Re: Derivatives-I

Can you tell the source of this question?

edupristine
Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am

### Re: Derivatives-I

Net cost of carry = PV(Benefits) - PV(Cost)

If Net cost of carry is greater than 0, then PV(Benefits) is greater than PV(Cost)

In that case, F = {S0 * (1 + r)^T - [PV(Benefits) - PV(Cost)] * (1 + r)^T} is greater than (S0 * (1 + r)^T)

The right-hand side of the inequality is the forward price of the asset assuming net cost of carry is equal to 0.