Lesson 2 Exercise 2: Application to the MPC Valuation Question in Overview

How do you determine the value of MPC’s long position for the September 1st delivery on any date before September 1st, 2012?

• on Jan 9, 2012? [Hint: value > 0. Why and how much?]
• on September 1, 2012 when the spot price is $120? [Hint: $20m. Why?]
• on March 1, 2012 when the spot price is $90? [Hint: value < 0. Why and how much?]

This exercise provides you with an opportunity to review some concepts of forward contracts on an underlying asset with no income, no storage cost. Please attempt to solve the question on your own and then submit your work to the Lesson 2: Exercise 2 Drop Box to retrieve the solution to the question. The solution is a locked file and can only be accessed once you have submitted your work to the Lesson 2: Exercise 2 Drop Box.

Review your answers in comparison to the solution. If you have wrong answers to the question, you should revisit the forward contracts concepts presented. And, if you still have difficulties understanding the material and why you made mistakes, please contact me.