CFA Practice Question

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CFA Practice Question

An investor took a long position in a forward contract on a stock. At the time of the contract initiation:

  • The stock was selling at $100.
  • The stock would pay a dividend of $1.50 in 60 days, $1.50 in 120 days, and another $1.50 in 180 days.
  • The no-arbitrage forward price was $98.98.
  • The contract would expire in 250 days.

Suppose the risk-free rate is 5.25%. At expiration the stock price is $80. What's the value of the forward contract at expiration?
A. $18.98
B. -$20
C. -$18.98
Explanation: ST = $80
F0(T) = $98.98
VT(0, T) = 80 - 98.98 = -$18.98
The contract expires with a value of negative $18.98, a gain to the short position.

User Contributed Comments 1

User Comment
danlan2 Forward contract value is "reversely" related to its price
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