CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
A stock trades at USD 50.00 and pays no dividends. The annual risk-free rate is 4.00% with annual compounding. The no-arbitrage price of a forward contract expiring in 2 years is closest to:
The forward price is about USD 54.08. It equals the spot price of USD 50 compounded at 4% for two years, 50 × 1.0816. Simple interest would understate it at USD 54.00.
- AUSD 54.00
- BUSD 54.08Correct
- CUSD 54.60
Explanation
F0 = 50 × 1.04^2 = 50 × 1.0816 = 54.08. Using simple interest gives 54.00, which ignores compounding. The 54.60 figure is not derived from the data.
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