CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
A forward contract on an asset that pays no income and has no storage costs is priced using no-arbitrage. At initiation, the forward price is most likely equal to the:
The forward price equals the spot price compounded at the risk-free rate to expiration. Buying the asset with borrowed funds replicates the forward, so arbitrage forces F0 = S0(1+r)^T. Expectations of the future spot price play no role in this pricing.
- Aexpected future spot price of the asset
- Bspot price compounded at the risk-free rate to expirationCorrect
- Cspot price discounted at the risk-free rate to expiration
Explanation
If the asset has no carry benefits or costs, buying it with borrowed money and holding it replicates a long forward. So F0 = S0(1+r)^T. The expected spot price is not used, because arbitrage pricing does not depend on expectations. Discounting the spot price would give a value below the arbitrage-free forward price.
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