- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 3. Pricing and Valuation of Forward Contracts

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**CFA Practice Question**

Consider a forward of 100 GOOG shares with Settlement Date of January 1, 20X6 while today is January 1, 20X2. Price of GOOG today is $500. The 6-month discount rate is 2.5%. The stock is expected to pay a $20 dividend every 12 months, beginning from July 1, 20X2. What should the forward price be?

A. $518.55

B. $609.20

C. $520.76

**Explanation:**Forward Price = [(S(0)-PVD)*(1+r)

^{N}] = (500 - 72.59)*(1.025

^{8}) Where 72.59 is the discounted value of 4 yearly dividend payments.

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**User Contributed Comments**
7

User |
Comment |
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najat |
I don't get why the PV of dividends should be subtracted from stock price and not added to it... could anyone enlighten me please?? |

teje |
payment of dividends reduces stock price, as it is an outflow of cash. This why they subtracted the PV of the dividend from the current stock price. What I don't understand is how they got the PV of the dividend...to me, it looks as if they will only receive three dividend payments as the dividend payments begin in july 20x2. also in calculating the PV of the dividend, if three payments, n should equal 6 and r = 3.5 correct? |

Mariana80 |
It's 4 payments. 1st is July 20X2, 2nd July 20X3, 3rd July 20X4 and 4th July 20X5. You have to discount those by 3.5 years, not 4. |

rovaniemi |
Could anyone please show me how they calculate PV of the dividend. thank you. |

schweitzdm |
So the first dividend is 6 months away:
20/(1.025) The second dividend is 18 months away or 3 six month periods: 20/1.025^3 Rinse and repeat for the remaining two dividends and then sum them up |

assiduous |
Question recycled! |

MARTINFRAN |
FORWARD = (S - PVD) * (1+R)^N F = (500 - (20/(1.025^1)+20/(1.025^3)+20/(1.025^5)+20/(1.025^7))^8 = 520.76 |