Present value for a FS 134Suppose you want to close out a FS at timet, t0<t<T.At timet: Close out a FS by adding a FP for the sameT.At timeT:Payoff from FP:ST-Ft,TYou will buy one unit of the underlying and payFt,Tfor it.Payoff from FS:Ft0,T-STYou will sell one unit ofthe underlying and receiveFt0,Tfor it.Sum of the payoffs:ST-Ft,T+Ft0,T-S=FTt0,T-Ft,TDiscounting with the risk-free rategives the present value for a FS:Note:()rTTtT
tteFFPV−−=,, 0()T T T t T T T t TrTT
tT
ttCFSFFFPVeFFPV=−=−==−=−, 0,, 0, 0, 000Derivative securities: Forwards - Introduction