CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
A non-dividend-paying stock trades at 80.00 in the spot market. The continuously compounded risk-free rate is 4% per year, and there are no other carrying costs or benefits. The no-arbitrage price of a futures contract expiring in six months is closest to:
The futures price is about 81.62. With no dividends or other carry, the futures price equals spot compounded at the risk-free rate for six months: 80 × e^(0.04×0.5). Using a full year would overstate it, and ignoring financing would leave it at spot.
- A80.00
- B81.62Correct
- C83.27
Explanation
F = S0 × e^(rT) = 80 × e^(0.04×0.5) = 80 × e^0.02 = 80 × 1.020201 = 81.616, about 81.62. Choosing 83.27 uses a full year of carry (80 × e^0.04 = 83.26). Choosing 80.00 ignores the cost of financing.
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