FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures
A 1-year forward price on a non-dividend-paying asset is USD 106.18 and the spot price is USD 100. Assuming continuous compounding and no arbitrage, what is the risk-free rate implied? (ln 1.0618 = 0.05997)
The implied continuously compounded risk-free rate is about 6.00%. Taking the natural log of the forward-to-spot ratio, ln(106.18/100), over one year gives roughly 0.06. The simple return of 6.18% is wrong because it ignores continuous compounding.
- A5.00%
- B6.00%Correct
- C6.18%
- D5.82%
Explanation
F/S = 1.0618, so r = ln(1.0618)/1 = 0.05997, about 6.00%. Using simple return gives 6.18%, which ignores continuous compounding.
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