Question

The following data is for questions 6 to 9. Show work for all questions

An asset is priced at $100. A two-year forward contract is created, with mark-to-market in one year (Month 12). The risk-free rate is 2%. The asset is worth $105 in Month 12.

6. What is the amount of the credit risk at Month 0?

a) $0

b) $2

c) $3

d) $5

7. What is the amount of the credit risk at Month 12?

a) $0

b) $2

c) $3

d) $5

8. Who bears the credit risk at Month 12?

a) The long

b) The short

9. What is the reset price of the forward at Month 12?

a) $100

b) $104.04

c) $105

d) $107.10