CFA Level I · CFA Level I Exam · Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives
A non-dividend-paying asset trades at 80.00. The annual risk-free rate is 5% with annual compounding. The asset has no storage costs or benefits. The no-arbitrage price of a one-year forward contract is closest to:
The no-arbitrage forward price is closest to 84.00. With no benefits or costs other than financing, the forward equals the spot price of 80 compounded at 5% for one year, giving 80 x 1.05 = 84.00.
- A80.00
- B84.00Correct
- C88.00
Explanation
Forward price = S0 x (1 + r)^T = 80 x 1.05 = 84.00. 80.00 ignores financing cost, and 88.00 would add 10% rather than 5%.
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