CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

An investor took a long position in a forward contract on a stock 100 days ago. 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%. The stock price now is $110. What's the value of the forward contract at this point?
A. $0
B. $10.10
C. $11.02
Explanation: At this time, two dividends remain: the first one in 20 days, and the second one in 80 days.

PV(D, t, T) = 1.5/1.052520/365 + 1.5/1.052580/365 = $2.98

Vt(0, T) = 110 - 2.98 - 98.98/1.0525150/365 = $10.1

A positive value is a gain to the long position.

User Contributed Comments 1

User Comment
gkendall85 This answer doesn't appear to subtract the present value of dividends, which would give (110-2.98) = 107.02. If the previous forward price was 98.98 this would give an answer of 8.04 to be discounted to present day. Any help?
You need to log in first to add your comment.