CMA Final · Strategic Financial Management · Forwards and Futures
A stock trades at Rs 400 and pays no dividend. The continuously compounded risk-free rate is 10% per annum (take e^0.05 = 1.0513). What is the fair price of a 6-month forward contract on the stock?
The fair forward price is Rs 420.52. With no dividends, the forward equals spot compounded at the risk-free rate for the contract period: 400 times e to the power 0.05, which is 1.0513, giving Rs 420.52.
- ARs 420.52Correct
- BRs 440.00
- CRs 400.00
- DRs 380.49
Explanation
Forward price = S0 x e^(rT) = 400 x e^(0.10 x 0.5) = 400 x 1.0513 = Rs 420.52. Rs 440 wrongly treats the full annual rate as applying for 6 months (using a full year). Rs 380.49 discounts instead of compounding.
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