Question
A share of PNG stock is currently worth $105.33. An investor enters a short position on a 6-month forward contract on the PNG stock with
A share of PNG stock is currently worth $105.33. An investor enters a short position on a 6-month forward contract on the PNG stock with a dealer. The risk-free rate is 4% APR semi-annual compounding. (Assume discrete compounding.)
Two months later, the price of the stock declines to $103.85. Answer the following questions:
(a) Who bears the credit risk?
(b) Is this current credit risk or potential credit risk?
(c) What is the amount of credit risk?
Alternatively
suppose that two months later the price of the stock increases to $113.85. Answer the following questions:
(a) Who bears the credit risk?
(b) Is this current credit risk or potential credit risk?
(c) What is the amount of credit risk?
Assume that the forward contract is marked-to-market every two months. What happens at the time of the first marking-to-market (two months after the initiation) if the stock price is $113.85 as given in the second alternative?
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