# Thread: Delivery Price of a Forward Contract

1. ## 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 $/£ exchange rate. Show that the delivery price is given by$\displaystyle 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.

• Spot exchange rate: $1 = £0.65785 • Exchange rate volatility: 26% per annum 4. you might need to use the Black-Scholes model since you are given volatility. and if you don't know what it is, you'd better wait to see it in the lecture, as you are not supposed to be able to derive it yourself ))) outside B-S, I attach a simple spreadsheet that explains how xrates work, I got to 0.6600 (not 0.6601 as required) but I didn't use B-S for that exchange rates.xls 5. If I use e^{rt}, ie continously compounded interest, I get that final 0.0001 (ie 0.6601):$\displaystyle F_t=F_0e^{(r-q)(T-t)}$this is a general formula where r-q can be either risk free rate minus divident stream, or, in your case, it is different in risk-free rates in domestic and foreign currency T=1 year, t=1/2 year$\displaystyle F_t=0.65785e^{(2.63/100-1.96/100)(1/2)}=0.660057, or 0.6601\$ rounded to the nearest 1/10,000