CFA Practice Question

There are 206 practice questions for this study session.

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

T = 8/12 = 0.667
S0 = 110
R = 0.045
F(0, T) = 110 (1.045)0.667 = 113.28

User Contributed Comments 12

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%
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
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