Consider an investor who owns 10,000 shares of Microsoft stock. The investor is closing on a new home in six months, and is planning on selling the Microsoft stock to pay for the home. The investor is concerned that the market may decline over the next six months, and as a result, is concerned that the price of Microsoft may decline during that time. So, the investor contacts a dealer to get a quote on a forward contract on Microsoft stock with settlement in six months. The dealer quotes a forward price of $30 per share for 10,000 shares with cash settlement. The investor proceeds to enter in the forward contract.
1. Did the investor go long or short the Microsoft forward contract?
2. Assume Microsoft stock is $33 in six months (settlement date). What is the investor’s cash settlement payoff on the forward contract?