CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
A stock trades at $50.00. The continuously compounded risk-free rate is 5% per year. A one-year forward on the stock is priced assuming no dividends. The forward price is closest to:
The forward price is the spot price compounded at the continuous risk-free rate for one year: 50 times e to the 0.05, which is about $52.56. With no income on the asset, the only adjustment is financing cost.
- A$50.00
- B$52.56Correct
- C$57.50
Explanation
F = 50 x e^(0.05) = 50 x 1.051271 = 52.56. Option A ignores the cost of financing the position. Option C applies 15% rather than 5%, which is not supported by the data.
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