Delta of Forward

[higaurav]

Hi David,

Q21 - exam 2008 II - The dividend yield of an asset is 10% per annum. What is the delta of a long forward contract on the
asset with 6-month to maturity?

I am not clear that why are we using delta for the "forward contract" and if we go by the cost of carry model, dividend should be increasing the value of the forward, not decreasing it..f = S0 e-qT – K e-rT . Also, I am not clear on why do we discount the stock price by dividend yield (little unclear on this too..). Pls help..

Just separately, I would also like to mention that your support has been excellent all this while and that clearly makes BT different and best.. could be a case study in the field of education!!

Rgrds
OM

 

[David Harper CFA FRM]

Hi OM,

You are very close with the forward value: f = S0*EXP[-qT] – K*EXP[-rT]
please note delta is first derivative = df/dS = change in forward/change in stock
just as, given f = aS, df/DS = a, here you can extract the EXP[-qt] directly: df/dS = EXP[-rT]

I feel the intuition is difficult. It is very nearly 1.0. Per cost of carry, dividends/income (and convenience yield) REDUCE the value of the forward since the forward long will not receive them in the meantime.

(That you for your note of support! much appreciated...)

David