CFA Level I · CFA Level I Exam · Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives
A stock trades at 80.00 and pays no dividends. The continuously compounded risk-free rate is 5% per year. The no-arbitrage price of a one-year forward contract on the stock is closest to:
The forward price is about 84.10. With no income or costs on the stock, the no-arbitrage forward price is the spot price compounded at the risk-free rate: 80 multiplied by e to the power 0.05 gives roughly 84.10.
- A76.10
- B80.00
- C84.100Correct
Explanation
F0 = S0 x e^(rT) = 80 x e^0.05 = 80 x 1.051271 = 84.10. The 76.10 value results from discounting the spot price (80 x e^-0.05) instead of compounding it. The 80.00 value ignores the cost of financing.
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