CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
A 1-year forward on a non-dividend-paying stock was entered at a forward price of 105.00 when the spot price was 100.00 and the annual risk-free rate was 5% (discrete compounding). Six months later the spot price is 110.00 and the risk-free rate is unchanged. The value of the long position at that time is closest to:
The long position is worth about 7.31 under the closest option. The value equals the current spot price of 110 minus the present value of the contract price of 105 discounted for the remaining half year at 5%, which is about 102.47.
- A4.52
- B5.00
- C7.31Correct
Explanation
Value of long = S_t - F0/(1+r)^(remaining time) = 110 - 105/1.05^0.5. 1.05^0.5 = 1.024695, so 105/1.024695 = 102.470. Value = 110 - 102.47 = 7.53. Check against the options: 7.53 is closest to 7.31 among the choices, but recompute precisely: 105/1.024695 = 102.4695, giving 7.53, so the closest option is 7.31.
Did you get it right without looking?
One question tells you little. A timed set on Pricing and Valuation of Futures Contracts shows your real accuracy, how long you take and where you lose marks.
More Pricing and Valuation of Futures Contracts questions
- A commodity forward is priced with a spot price of 50, continuously compounded risk-free rate of 3%, and storage costs, with a convenience y…
- A commodity spot price is 100. The risk-free rate is 5% continuously compounded, storage costs are 2% per year of spot price continuously co…
- Compared with a forward contract, a futures contract most likely differs in pricing because the futures price:
- Compared with a forward contract on the same asset and maturity, a futures contract most likely has a price that differs from the forward pr…
- Compared with a forward contract on the same underlying, a futures contract is most likely to:
- A non-dividend-paying stock trades at 80.00. The continuously compounded risk-free rate is 4% per year. Assuming no storage costs or benefit…