- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 31. Pricing and Valuation of Forward Commitments
- Subject 3. Pricing Equity Forwards and Futures
CFA Practice Question
Continue with the example in question 1. Consider a stock priced at $65, which will pay a dividend of $0.75 in 50 days and another $0.75 in 100 days. The risk-free rate is 6.4%. Suppose the investor enters into the contract that expires in 150 days at $65.16. At the expiration date the stock price is $61. What's the value of the forward contract at this time?
Correct Answer: -$4.16
The value of the contract is VT(0, T) = V150/365(0, 150/365) = 61 - 65.16 = -$4.16. The negative value indicates a loss for the investor: he has to pay $65.16 for a stock that is worth only $61.
User Contributed Comments 7
| User | Comment |
|---|---|
| danlan2 | Do we need to divide -4.16 by 1.046^(150/365) ? |
| danlan2 | "At this time" means on the date 150, so no need to divide it by 1.046^(150/365) |
| aravinda | are we not supposed to consider the dividend payment that will be distributed on the same day? Remember we did this earlier where we had to calculate the value at time = t in between the initiation and the expiry date of the contract. |
| DB01 | there is no div at expiration (T=150) |
| bodduna | at expiration, Vt=St-F(o,t) |
| davidt87 | in case anyone else is wondering about the opportunity cost of losing those dividends, that should already be priced into the price of the forward when it was purchased |
| aglamb | @aravinda.. we did it earlier because suppose we are going to enter into another equity forward, that would be how that new forward be priced. But at T=150, we are not expecting any dividends. So it should be S(T) - F0(T) |