- 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**

John has an asset that is worth $110. He plans to sell it in 8 months. The risk-free interest rate is 4.5%. Assume monthly compounding. What should the forward price be?

Correct Answer: 113.28

S

R = 0.045

F(0, T) = 110 (1.045)

T = 8/12 = 0.667

S

_{0}= 110R = 0.045

F(0, T) = 110 (1.045)

^{0.667}= 113.28###
**User Contributed Comments**
14

User |
Comment |
---|---|

Bill12345 |
Can you calculate this on calculator |

business |
Why do you get a different figure if you use (110*(1+0.045*8/12)^1. Which method is more accurate???? |

business |
Sorry you get 113.28. No difference. But if the figures are big there is a slight difference with this formular. |

krunk |
@Billy12345: no, you can't calculate it on a calculator, you can only answer this question using a super computer housed in BlackRock's nuclear-proof bunkers. You are not allowed to bring it into the exam. |

robertucla |
^+1 |

assiduous |
Why are we dividing 8 by 12? If it is monthly compounding we should be dividing .045 by 12. Hence, [1+(.045/12)]^8 * 110 = 113.34 Roughly the same answer but for learning purposes (and less confusion) its probably better to stick with the principles of compounding. |

farhan92 |
N = 8/12 I/Y = 4.5% PV=110 CPT FV =113.28 |

maggiew |
Second assiduous. |

Fabulous1 |
Yes, I also approve addiduous message |

cfastudypl |
I used the same method as assiduous but AN method is better. |

Inaganti6 |
Monthly compounding means raised to the power not simple multiplication....which results in 113.34 as ASSIDUOUS explained... compounding means raised to the power always...hard and fast rule but I don't see why 113.28 should make sense. |

Sagarsan88 |
PV 110 I/Y 4.5/12 N 8 Cpt FV Ans 113.34 |

JNW1980 |
@assiduous I got the same answer. You are correct. |

JNW1980 |
Some of these questions are really good. Other ones contain really stupid errors. |