CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

Continue with the example in question 1. Consider a stock priced at $65, which will pay a dividend of $0.75 in 50 days and another $0.75 in 100 days. The risk-free rate is 6.4%. Suppose the investor enters into the contract that expires in 150 days at $65.16. Now, 55 days later, the stock price is $60. What's the value of the forward contract at this point?
Correct Answer: -$4.86

At this point the first dividend has been paid so it is not relevant. The second dividend will be paid in 45 days. The present value of this dividend is 0.75/(1.064)45/365 = 0.74. The value of the contract is Vt(0, T) = V95/365(0, 150/365) = (60 - 0.74) - 65.16/(1.064)95/365 = -$4.86. The contract has a negative value.

User Contributed Comments 2

User Comment
danlan2 The first payment is irrelevant, so

PVD=0.75/1.064^(45/365)=0.74

V=60-0.74-65.16/1.064^(95/365)
yly14 if a dividend is to be paid at t=100, and the forward is for t=80, the present value of the dividend is considered in the valuation. But if a foward contract's value is to be calculated before expiration but after a dividend payment, this payment is not considered.
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