Which one of the following is true regarding forward contracts?
A) The upfront costs to enter a forward contract can be significant.
B) If a buyer of a forward contract earns a $200 profit, then the seller will also profit by $200.
C) The buyer wins when market prices are less than the forward price.
D) The payoff profile for the buyer of a forward contract is an upward sloping linear function.
E) If the seller of a forward contract earns a profit, then the buyer has neither a profit nor a loss.

Question

Quizplus · Accepted Answer

The payoff profile for the buyer of a forward contract is indeed an upward sloping linear function, reflecting that as the underlying asset's price increases above the forward price, the buyer's profit increases linearly. Conversely, if the price falls below the forward price, the buyer incurs a loss that increases linearly.

Which One of the Following Is True Regarding Forward Contracts