- CFA Exams
- CFA Exam: Level II 2021
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 3. Equity Forward and Futures Contracts

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**CFA Practice Question**

A portfolio manager expects to purchase a portfolio of stocks in 180 days. To hedge against the market he decides to take a long position on a 180-day forward contract on the S&P 500 stock index. The index is currently at $1245. The continuously compounded dividend yield is 1.45%. The discrete risk-free rate is 4.6%. What is the no-arbitrage forward price on this contract?

Correct Answer: $1263.87

r

_{c}= ln(1 + r) = ln(1 + 0.046) = 0.045F

_{0}(T) = (S_{0}e^{-δT}) e^{rc T}= (1245 x e^{-0.0145 x (180/365)}) (e^{0.045 x (180/365)}) = $1263.87###
**User Contributed Comments**
8

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

turtle |
F(0,T)=So*e^(r-b)T |

PaulChia |
there is a typo in the ans risk free rate is 0.046 not 0.045 ans should be 1,264.49 |

yly14 |
there is no typo, as the continuous compounded r.f.r. should be ln(1+4.6%) = 4.5%. Do be careful though to divide 180 by 365 instead of 360. |

mcspaddj |
Thanks yly14. I was thinking there was a typo as well. |

robertucla |
You need continuous not discrete |

ashish100 |
this is some mind boggling shite.. need to take a break |

ashish100 |
i get it now. :D |

davidt87 |
just be sure to check if the questions asking about continuous if the discount rate is continuous or discrete |