Value of a forward on an index-with a contract multiplier 14. In order to hedge

Question

Value of a forward on an index-with a contract multiplier 14. In order to hedge against a potential price increase over the next three months, the portfolio manager decides to take a long position on a three month forward contract on the price-only stock index. Risk free rate is 8%. At t=0 the index is at 900, Contract multiplier is S100. Assume that the contract was signed at the "No arbitrage" forward price at t-0, what is the value of the contract in two months, at which time the index value is 950?

Explanation / Answer

Value of contract in 2 months=100*(950*e^(8%*1/12)-900*e^(8%*3/12))=3817.328541

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