- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 4. Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives
- Subject 2. Costs and Benefits Associated with Owning the Underlying
CFA Practice Question
A security is currently trading at $97. It will pay a coupon of $5 in two months. No other payouts are expected in the next six months. Assume monthly compoudning at 12%. What should the forward price be on the security for delivery in six months?
Correct Answer: 94.7368
We have that S0 = 97, and the PV of holding benefits is 5 / (1 + 0.12 * (2/12))2/12 = 4.9835. Thus, the forward price should be (97 - 4.9835) * (1 + 0.12 * (6/12))6/12 = 94.7368.
User Contributed Comments 8
| User | Comment |
|---|---|
| maryprz14 | No idea!!!!!!!!!!! :( |
| dbedford | F = (S - PVben)[(1+rf)x(compound freq)]^compound freq PVben = ben/[(1+rf)freq]^freq |
| khalifa92 | very nice !!! |
| khalifa92 | you have to discount the dividend to the same period of S0 subtract dividend from S0 because its lost benefits then monthly compound the value to the future |
| khalifa92 | for clarification: the solution can be solved in two ways: 1- u can discount the divided to reach at time 0 subtract it from S0 then compound to the future 6/12 2- u can compound S0 6/12 and then subtract dividend compounded with 4/12 |
| umesh2802 | why we r adjusting for frequency |
| jzty | The way to compound is not right, and everything else is ok. |
| chris21Feb | if compounded monthly, then why is the PV of Dividend not 5 / (1.01)^2 ? |