Present value for a FP 133Suppose you want to close out a FP at timet, t0<t<T.At timet: close out a FP by adding a FS for the sameTAt timeT:Payoff from FP:ST-Ft0,TYou will buy one unit of the underlying and payFt0,Tfor it.Payoff from FS:Ft,T-STYou will sell one unit ofthe underlying and receiveFt,Tfor it.Sum of the payoffs:ST-Ft0,T+Ft,T-S=FTt,T-Ft0,TDiscounting with the risk-free rategives the present value for a FP:Note:()rTT
tTtteFFPV−−=, 0,()T T t T T t T T TrTT
tT
ttCFFSFFPVeFFPV=−=−==−=−, 0, 0,, 0, 000Derivative securities: Forwards - Introduction