FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures
A zero-coupon bond with a current price of USD 940 will mature in 2 years. A 1-year forward contract on this bond is being priced when the continuously compounded 1-year risk-free rate is 3% (e^0.03 = 1.030455). Which is the forward price, treating the bond as paying no income before the forward's delivery date?
The forward price is about USD 968.63. A zero-coupon bond pays no income before delivery, so the forward equals the spot price grown at the risk-free rate for one year: 940 × e^0.03 ≈ 968.63.
- AUSD 912.00
- BUSD 940.00
- CUSD 968.63Correct
- DUSD 1,000.00
Explanation
A zero-coupon bond pays no income before delivery, so F0 = 940 × e^(0.03×1) = 940 × 1.030455 = 968.63. USD 912 wrongly discounts rather than compounds. USD 940 ignores financing cost. USD 1,000 is the bond's face value, not the forward price.
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 non-dividend-paying stock trades at $50. The continuously compounded risk-free rate is 4% per year. What is the no-arbitrage forward price…
- 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…
- 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 stock expected to pay a USD 2 dividend in 3 months trades at USD 80. The continuously compounded risk-free rate is 6% per year. What is th…
- A 1-year forward on a bond is quoted when the bond's spot price is $950 and it will pay a coupon of $60 in 6 months. The continuously compou…