- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 33. Pricing and Valuation of Forward Commitments
- Subject 3. Pricing Equity Forwards and Futures

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**CFA Practice Question**

Consider a stock priced at $150, which will pay a dividend of $1.25 in 30 days, $1.25 in 120 days, and another $1.25 in 210 days. The risk-free rate is 5.25%. If you take a short position in a forward contract that expires in 250 days, what is the forward price if the contract is established today and expiring in 250 days?

A. $150

B. $149.74

C. $151.53

**Explanation:**First find the present value of the dividends: PV(D, 0, T) = PV(D, 0, 250/365) = 1.25/(1.0525)

^{30/365}+ 1.25/(1.0525)

^{120/365}+ 1.25/(1.0525)

^{210/365}= $3.69.

Then find the forward price: F

_{0}(T) = F

_{0}(250/365) = (150 - 3.69) (1.0525)

^{ 250/365}= $151.53.

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**User Contributed Comments**
3

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

broadex |
Can some explain why we do not use 1+ (0.0525*120/365) when discounting interest rates instead of 1.0525^120/365 Sounds stupid but im consufed. |

rjdelong |
Yes great question, this is a stock. The exponent method is used for stocks, and I believe other instruments other than bonds. For bonds, the convention is simple interest (the multiplication rule you showed). |

sumeetb |
What you showed above @broadex is used only with LIBOR rates, otherwise use continuous compounding |