- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 6. Pricing and Valuation of Swap Contracts
CFA Practice Question
The spot price of a stock that does not pay dividends is $35, and the 1-year risk-free interest rate is 5.0%. An investor enters into a long forward contract for delivery in one year's time. The forward price is $38. This forward contract is a(n) ______.
A. off-market forward contract
B. standard forward contract
C. premium forward contract
Explanation: After one year, the accumulated value of the initial stock price is 35x1.05 = $36.75. This is the forward price of a market-priced forward contract, so the premium of this market forward is 38 - 36.75 = $1.25. An off-market forward contract starts with a non-zero value.
A regular forward contract does not involve an exchange at the beginning of the contract. At the beginning the contract has zero value.
User Contributed Comments 3
| User | Comment |
|---|---|
| Sandar | the buyer needs to pay $1.25 to enter into this forward contract. |
| danbacarin | Ok so clear on why A is valid. But why is C not correct too? Is this then a discount forward contract? |
| xenocygne | The underlying is a stock here |