- 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**

A security is currently trading at $97. It will pay a coupon of $5 in two months. No other payouts are expected in the next six months. Assume monthly compoudning at 12%. What should the forward price be on the security for delivery in six months?

Correct Answer: 94.7368

We have that S

_{0}= 97, and the PV of holding benefits is 5 / (1 + 0.12 * (2/12))^{2/12}= 4.9835. Thus, the forward price should be (97 - 4.9835) * (1 + 0.12 * (6/12))^{6/12}= 94.7368.###
**User Contributed Comments**
8

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

maryprz14 |
No idea!!!!!!!!!!! :( |

dbedford |
F = (S - PVben)[(1+rf)x(compound freq)]^compound freq PVben = ben/[(1+rf)freq]^freq |

khalifa92 |
very nice !!! |

khalifa92 |
you have to discount the dividend to the same period of S0 subtract dividend from S0 because its lost benefits then monthly compound the value to the future |

khalifa92 |
for clarification: the solution can be solved in two ways: 1- u can discount the divided to reach at time 0 subtract it from S0 then compound to the future 6/12 2- u can compound S0 6/12 and then subtract dividend compounded with 4/12 |

umesh2802 |
why we r adjusting for frequency |

jzty |
The way to compound is not right, and everything else is ok. |

chris21Feb |
if compounded monthly, then why is the PV of Dividend not 5 / (1.01)^2 ? |