FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures
A stock trades at $50 and pays no dividends. The continuously compounded risk-free rate is 4% per year. What is the fair price of a 6-month forward contract on the stock (nearest cent)?
The fair forward price is $51.01, because a forward on a non-dividend stock equals spot compounded at the risk-free rate: 50 × e^(0.04×0.5). Simple interest would give $51.00, which ignores continuous compounding.
- A$50.00
- B$51.00
- C$51.01Correct
- D$52.00
Explanation
F0 = S0 e^{rT} = 50 × e^{0.04×0.5} = 50 × e^{0.02} = 50 × 1.020201 = 51.01. Simple interest gives 51.00 and ignores continuous compounding. Using 2% without compounding also gives 51.00, which is not the exact value.
Did you get it right without looking?
One question tells you little. A timed set on Pricing Financial Forwards and Futures shows your real accuracy, how long you take and where you lose marks.
More Pricing Financial Forwards and Futures questions
- A forward contract on a stock paying a continuous dividend yield is priced above the no-arbitrage level F0 = S0 e^{(r−q)T}. Which strategy l…
- Under the cost-of-carry model, a forward on an asset with no income or storage costs trades at a price above S0 e^(rT). Which action capture…
- The one-year futures price of a commodity is 72 and the two-year futures price is 71. The risk-free rate is 3% and storage costs are 1% per …
- Gold has spot price USD 1,900, storage costs of 1% per year of spot (continuous), and no income. The continuously compounded risk-free rate …
- A trader considers delivering a Treasury bond into a futures contract with a settlement price of 120. Bond A has a quoted price of 138.00 an…
- Which statement best distinguishes futures contracts from forward contracts?