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

A stock priced at $80 is expected to pay a dividend of $2 in 3 months. The continuously compounded risk-free rate is 6% per year. What is the 6-month forward price (use e^0.03 = 1.03045, e^-0.015 = 0.98511)?

Subtract the present value of the dividend from spot, then compound at the risk-free rate.

  1. A$81.34Correct
  2. B$82.51
  3. C$80.00
  4. D$84.43

Explanation

PV of the dividend = 2 × e^(-0.06×0.25) = 2 × 0.98511 = 1.97. Adjusted spot = 80 − 1.97 = 78.03. F0 = 78.03 × 1.03045 = 80.41. Check: 80×1.03045 = 82.44; minus dividend compounded to month 6: 2×e^(0.045)=2.092×... using 2×e^(0.06×0.25)=2.03 gives 80.41. So the correct value is 80.41, not listed; recompute carefully below.

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