CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
A stock priced at 50 will pay a dividend of 2 in three months. The annual risk-free rate is 4% with annual compounding. The no-arbitrage price of a six-month forward contract is closest to:
Subtract the present value of the dividend (about 1.98) from the spot price of 50 to get 48.02, then compound at 4% for half a year. The result is about 48.97, closest to 49.00. Ignoring the dividend would give 50.99.
- A49.00Correct
- B50.99
- C51.00
Explanation
PV of dividend = 2/1.04^0.25 = 2/1.009853 = 1.9805. Spot less PV = 48.0195. Compounding 1.04^0.5 = 1.019804 gives 48.0195 × 1.019804 = 48.97, about 49.00. Ignoring the dividend gives 50.99, and 51.00 would be wrong too.
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