Questions:
Salman currently owns a single share of Amazon (which does not pay any dividend), and which is currently trading at $194 as of July 12, 2024. He has entered into a contract to sell these shares forward to a broker at a price of $220 on January 12 2024, six months from now. 

What will be the value of this contract for both parties if the price falls by 10% at the end of the sixth months.

What if it rises by 10%?

Reference answers:
At the beginning of the contract, the value of the contract will be zero. So, on July 12 2024:
Value of the forward contract for Salman = 0 
Value of the forward contract for broker = 0 


The value of a forward contract at maturity is calculated using the following formulas:

# Selling party 
Value of the contract = Forward price agreed - Spot price on settlement date 

# Buying Party 
Value of the contract = Spot Price on settlement date - Forward price agreed  


If the price falls by 10%, the new price will be 194  * 0.9 = 174.6 
  
# Selling Party (Salman) 
Value of the contract = Forward price agreed - Spot price on settlement date 
Value of the contract = $220 - $174.6 = $45.4 

The value of the contract for Salman will be $45.4 because Salman will have an already fixed price of $220 while the stock will be trading at 10% less price. Therefore, Salman will gain from this forward contract.  

  
# Buying Party (Broker)
Value of the contract = Spot Price on settlement date - Forward price agreed  
Value of the contract = $174.6 - $220 = - $45.4 

The value of the contract for Broker will be - $45.4 because the broker will have to buy the shares at a price that will be higher than the one already prevailing in the market which will result in a loss for them.

If price rises by 10%, the new price will be $194 * 1.1 = $213.4 
  
# Selling Party (Salman) 
Value of the contract = Forward price agreed - Spot price on settlement date 
Value of the contract = $213.4 - $220 = - $6.6 

The value of the contract for Salman in this case will be negative because Salman will have to sell the shares at a price that is less than the one that he will be able to sell for in the market. 


# Buying Party (Broker) 

Value of the contract = Spot Price on settlement date - Forward price agreed 
Value of the contract = $220 - $213.4 = $ 6.6  

The broker will gain from the contract because he will be able to buy the shares at a price lower than the one that he would otherwise be able to sell for in the market.