- 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**

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.

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**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. |