- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 2. No-Arbitrage Forward Contracts
CFA Practice Question
Three months ago, an investor entered into a six-month forward contract to sell a stock. The delivery price agreed to was $55. Today, the stock is trading at $45. Suppose the three-month interest rate is 4.80%, the stock is expected to pay a dividend of $2 in one month, and the one-month rate of interest is 4.70%. What is the value of the contract held by the investor? Assume continuously compounding.
A. 43.5272
B. 43.5191
C. 47.5593
Explanation: The present value of this dividend payment is e(-0.047 * 1/12) = 1.992. The arbitrage-free forward price is (45 - 1.992) * e(0.048 * 3/12) = 43.5272.
User Contributed Comments 3
| User | Comment |
|---|---|
| FRAbyFRA | They're asking for value yet answers are prices. |
| sunday128 | Exactly... |
| syvestro | Question is written wrong. This isn't the value of the contract. It's the price of the offsetting contract that you would use to value the held contract. |