- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 2. No-Arbitrage Forward Contracts

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**CFA Practice Question**

Suppose that the current price of gold is $1000 per ounce. It costs $2 per ounce per month to store gold (payable monthly in advance). Suppose also that the term structure is flat with a continuously compounded rate of interest of 5% for all maturities. What should be the forward price of gold for delivery in three months?

A. $1007.04

B. $1012.84

C. $1018.63

**Explanation:**We first find the present value of the storage costs: 2 + 2 * e

^{(-0.05 * 1/12)}+ 2 * e

^{(-0.05 * 2/12)}= 5.9751.

The forward price is (1000 + 5.9751) * e

^{(0.05 * 0.25)}= 1018.63.

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