- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 46. Basics of Derivative Pricing and Valuation
- Subject 10. Put-Call-Forward Parity

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**CFA Practice Question**

The options and a forward contract expire in 90 days. The continuously compounded risk-free rate is 5%, and the exercise price is 75. The call price is 5.5, and the put price is 9.2. What is the forward price?

Correct Answer: 71.26

Rearrange the put-call-forward parity equation: F(0, T) = (c

_{0}- p_{0})(1 + r)^{T}+ X = (5.5 - 9.2) 1.05^{(90/365)}+ 75 = 71.26###
**User Contributed Comments**
5

User |
Comment |
---|---|

sharapov |
continuous compounding usually involves an exponent function |

PhiWong |
How to determine whether it is a short or long forward from the question? |

bmeisner |
I thought we had to bring this back to discrete interest rate so I used exp(.05) as r. It doesn't change the answer much, i get 71.254. Is the r for forwards discrete or continuous in this case? I thought since it is (1+r)^T that it implied discrete interest rates... |

Smiley225 |
good obvervation bmeisner. The question says "continuously compounded risk-free rate" On the whole i am not sure when to use discrete or continuous....i am aware that one must use either or but not a combination of both.....suggestions anyone? |

Logaritmus |
Usually in derivativative models we use exponents but it depends on discount factor. From my point of view continious compounding is determined by DF(T)=exp(-rT) [remind: discount factor is PV of 1 at time T]. Especially in option pricing. But usually daily compounding is very close to continious compounding. |