- 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

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**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) = 1.5/1.0525

^{20/365}+ 1.5/1.0525

^{80/365}= $2.98

Vt(0, T) = 110 - 2.98 - 98.98/1.0525

^{150/365}= $10.1

A positive value is a gain to the long position.

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**User Contributed Comments**
1

User |
Comment |
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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? |