Question
You hold an asset ABC currently worth 1 million. For an operative reason, you plan to sell asset ABC in 10 months. Due to the
You hold an asset ABC currently worth 1 million. For an operative reason, you plan to sell asset ABC in 10 months. Due to the uncertainty of asset ABC, you would like to manage the risk and use a forward contract to hedge away the risk of selling by entering the forward contract to sell Asset ABC in 10 months. It is realized the annual risk-free rate from Treasury bills is 3 percent. (a) Determine the appropriate price you should receive in 10 months by the forward contract.
(b) The counterparty to the forward contract is willing to enter the opposite position at a forward price of 1.07 million. Explain the strategy you need to execute to take advantage of the situation. Show the strategy in detail and compute the annual rate of return of the strategy.
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