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

A non-dividend-paying stock trades at USD 80. The continuously compounded risk-free rate is 5% per year. What is the theoretical no-arbitrage forward price for delivery in 6 months (use e^0.025 = 1.025315)?

The forward price is about USD 82.03. With no income on the stock, the forward equals the spot price compounded at the risk-free rate for the contract's life: 80 × e^(0.05 × 0.5) = 82.03. This reflects the financing cost of buying the stock now.

  1. AUSD 80.00
  2. BUSD 82.03Correct
  3. CUSD 82.00
  4. DUSD 84.00

Explanation

For an asset with no income or storage costs, F0 = S0 e^(rT) = 80 × e^(0.05×0.5) = 80 × 1.025315 = 82.025, about USD 82.03. USD 80.00 ignores the cost of financing. USD 82.00 comes from rounding the factor to 1.025 and is not the exact value. USD 84.00 uses the annual rate for the full year in simple form, ignoring the 6-month horizon.

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