CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
A forward contract on an asset was initiated at a forward price of USD 100.00 with 1 year to expiration. Now 3 months have passed, the spot price is USD 104.00, and the annual risk-free rate is 4.00% with annual compounding. The asset pays no income. The value of the long position is closest to:
The long position is worth about USD 6.90, found by subtracting the present value of the forward price, USD 97.10, from the spot price of USD 104.
- AUSD 0.97
- BUSD 3.02Correct
- CUSD 4.00
Explanation
Value = S_t − F0/(1+r)^(T−t) = 104 − 100/1.04^0.75. 1.04^0.75 = e^(0.75×0.03922)=e^0.029415=1.02985. 100/1.02985 = 97.10. Value = 104 − 97.10 = 6.90. This differs from the options, so recompute against options: none match 6.90.
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