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FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures

A non-dividend-paying stock trades at $50. The continuously compounded risk-free rate is 4% per year. What is the no-arbitrage forward price for delivery in 6 months (use e^0.02 = 1.0202)?

The forward price is about $51.01. With no income or storage costs, the forward equals the spot price compounded at the risk-free rate for the contract term: 50 × e^(0.04×0.5) = 50 × 1.0202, which gives $51.01.

  1. A$50.00
  2. B$51.01Correct
  3. C$52.00
  4. D$49.01

Explanation

For an asset with no income or storage costs, F0 = S0 e^(rT) = 50 × e^(0.04×0.5) = 50 × 1.0202 = 51.01. Option $52.00 uses simple annual interest on a full year (50×1.04), ignoring the 6-month term. $49.01 discounts instead of compounding.

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