Skip to content

CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities

A dealer holds a long forward on an asset that pays no income. Compared with the position value when the contract was initiated, a decline in the risk-free rate, with the spot price unchanged, will most likely cause the value of the long forward to:

The value of the long forward will most likely decrease. Its value is the spot price minus the present value of the fixed forward price, and a lower risk-free rate raises that present value, which reduces the long position's value when the spot price is unchanged.

  1. AdecreaseCorrect
  2. Bremain unchanged
  3. Cincrease

Explanation

Long value = S - F/(1+r)^(T-t). A lower rate reduces the discount, so the PV of the fixed forward price increases. Subtracting a larger PV lowers the long position value, so it decreases.

Did you get it right without looking?

One question tells you little. A timed set on Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities shows your real accuracy, how long you take and where you lose marks.

Practise Pricing and Valuation of Forward Contracts and for an Underlying with Varying MaturitiesFree diagnostic mock

More Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities questions