Chartered Financial Analyst (CFA) Practice Exam Level 2

What is the formula for the value of a forward position at time T?

1. Vt = PV * (F0 - Ft)

2. Vt = PV * (Ft - F0)

3. Vt = (F0 - Ft) / (1 + Rf)^T

4. Vt = (Ft + F0) / (1 + Rf)^T

The correct answer is: Vt = PV * (Ft - F0)

The value of a forward position at time T can be understood through the components of forward contracts and their relation to future prices. The formula for the value of a forward position is derived from the difference between the contracted forward price (F0) and the current forward price (Ft) observed at time T, adjusted for the present value factor that accounts for the risk-free rate. In this case, the formula indicating that the value is equal to the difference between the current forward price and the contracted forward price, represented mathematically as (Ft - F0), appropriately captures the notion that if the current forward price at time T exceeds the contractual price, the position has a positive value. Conversely, if the current price is below the contractual price, it would indicate a loss in value. The presence of the present value factor "PV" adjusts for the time value of money. However, in the typical notational formulas for straightforward valuation of financial derivatives, this is often implicitly understood or not included directly in the context of just finding the value of the position at a specific time T. This perspective reinforces the understanding of how active positions in financial derivatives work regarding market prices at specific times compared to the positions entered into.