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

A stock expected to pay a USD 2 dividend in 3 months trades at USD 80. The continuously compounded risk-free rate is 6% per year. What is the 6-month forward price (approximately)?

Subtract the present value of the dividend from spot, then compound: (80 − 1.97) × e^(0.03) ≈ USD 80.4. Ignoring the dividend would overstate the forward at about 82.43.

  1. AUSD 82.43
  2. BUSD 80.46Correct
  3. CUSD 78.46
  4. DUSD 82.46

Explanation

PV of dividend = 2 × e^(−0.06×0.25) = 2 × 0.98511 = 1.970. Adjusted spot = 80 − 1.970 = 78.030. F = 78.030 × e^(0.03) = 78.030 × 1.030455 = 80.41. This is closest to 80.46 only approximately; ignoring the dividend gives 82.43.

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