Results 1 to 5 of 5

Math Help - Delivery Price of a Forward Contract

  1. #1
    Newbie
    Joined
    Mar 2009
    From
    Plymouth
    Posts
    12

    Delivery Price of a Forward Contract

    Hi all,

    I am beginning a new module on Monday which looks how Mathematics is used in the financial world. We have been asked to do some reading and answer the following question, which I am struggling to get my head around:

    A trader wishes to sell US Dollars in 6 months time in exchange for Sterling. After considering his options, he chooses to sell a six-month forward contract on the $/£ exchange rate. Show that the delivery price is given by f_{0}=0.6601$/£.

    I am having issues grasping the concept of selling a current asset for a price it may be worth in the future, and I cannot find an online resource that will talk me through it. Any pointers much appreciated.

    Thanks in advance!
    Follow Math Help Forum on Facebook and Google+

  2. #2
    Senior Member
    Joined
    Nov 2010
    From
    Hong Kong
    Posts
    255
    Please post the full question.
    Generally, the difference between today's and future exchange rates can be explained by different interest-free rates paid in these two currencies. (So time has different money value in USD and GBP).
    Follow Math Help Forum on Facebook and Google+

  3. #3
    Newbie
    Joined
    Mar 2009
    From
    Plymouth
    Posts
    12
    My apologies -we are also given the following information:
    • Risk-free interest rate operating in the UK: 2.63%
    • Risk-free interest rate operating in the US: 1.96%
    • Spot exchange rate: $1 = £0.65785
    • Exchange rate volatility: 26% per annum
    Follow Math Help Forum on Facebook and Google+

  4. #4
    Senior Member
    Joined
    Nov 2010
    From
    Hong Kong
    Posts
    255
    you might need to use the Black-Scholes model since you are given volatility. and if you don't know what it is, you'd better wait to see it in the lecture, as you are not supposed to be able to derive it yourself )))

    outside B-S, I attach a simple spreadsheet that explains how xrates work, I got to 0.6600 (not 0.6601 as required) but I didn't use B-S for that

    exchange rates.xls
    Last edited by Volga; March 23rd 2011 at 07:58 PM.
    Follow Math Help Forum on Facebook and Google+

  5. #5
    Senior Member
    Joined
    Nov 2010
    From
    Hong Kong
    Posts
    255
    If I use e^{rt}, ie continously compounded interest, I get that final 0.0001 (ie 0.6601):

    F_t=F_0e^{(r-q)(T-t)} this is a general formula where r-q can be either risk free rate minus divident stream, or, in your case, it is different in risk-free rates in domestic and foreign currency
    T=1 year, t=1/2 year

    F_t=0.65785e^{(2.63/100-1.96/100)(1/2)}=0.660057, or 0.6601 rounded to the nearest 1/10,000

    And I didn't have to use volatility for that.
    Follow Math Help Forum on Facebook and Google+

Similar Math Help Forum Discussions

  1. Contract in GAAP
    Posted in the Business Math Forum
    Replies: 0
    Last Post: December 6th 2011, 04:41 AM
  2. Replies: 0
    Last Post: August 12th 2011, 05:09 PM
  3. Efficiency Delivery Rating
    Posted in the Business Math Forum
    Replies: 0
    Last Post: May 14th 2011, 11:29 AM
  4. contract this log
    Posted in the Algebra Forum
    Replies: 1
    Last Post: June 10th 2010, 08:31 AM
  5. Delivery
    Posted in the Algebra Forum
    Replies: 2
    Last Post: July 20th 2005, 02:15 AM

Search Tags


/mathhelpforum @mathhelpforum