- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 3. Equity Forward and Futures Contracts
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.
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 |