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CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities

An analyst prices a forward contract on a non-dividend-paying stock using the no-arbitrage approach. Holding the spot price and the risk-free rate constant, the forward price is most likely to be higher for the contract with:

The forward price is higher for the longer-dated contract. With no income or carrying costs, the forward price equals the spot price compounded at the risk-free rate over the contract's life, so more time means more compounding and a higher forward price when rates are positive.

  1. Aa longer time to expirationCorrect
  2. Ba shorter time to expiration
  3. Cthe same price regardless of expiration

Explanation

For an asset with no income or storage costs, F0 = S0(1+r)^T. With a positive risk-free rate, a longer maturity raises the compounding factor and so the forward price. The shorter-maturity contract has a lower price, and expiration does matter.

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