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Lock in a price, or spot an arbitrage?

Move prices to see contract payoffs, margin calls, hedges and the trades that keep forward prices fair. Solve has 10 questions worked step by step.

Contracts and cash flows · Step 1 of 12

Agree on a delivery price today

payoff per unit ($)
01020304050−50−2502550
delivery spot ($)
long payoffshort payoff
ring: selected input
Spindlegrain Foods plans a wheat trade: spot wheat costs $40 per unit today, and the agreement covers 100 units. A forward sets the delivery price now, with nothing paid today. The long agrees to buy and the short agrees to sell at that price.
Try it: Move the delivery spot price above, below and exactly to the agreed price.
Spot price per unit at delivery$35.00
Agreed forward price per unit$42.00
Long per unit
−$7.00
Short per unit
$7.00
Combined
$0.00
Long payoff per unit = ST − F0 = (35 − 42) = −$7.00.
Short payoff per unit = F0 − ST = (42 − 35) = $7.00.
For 100 units: long (−7 × 100) = −$700; short (7 × 100) = $700.
Combined payoff = (−7 + (7)) = $0.00. The short gains; the long loses.
Check yourself
When delivery spot equals the agreed forward price, the long and short payoffs are…

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