CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
An asset has a spot price of 100 and a continuously compounded risk-free rate of 6%. Storage costs are 2% per year, continuously compounded, and there is no convenience yield. The no-arbitrage price of a one-year forward contract is closest to:
Storage costs add to the cost of carry, so the forward price is 100 × e^(0.06+0.02) = 108.33. Ignoring storage gives 106.18, and subtracting it gives about 104.08, both of which understate the cost of holding the asset.
- A103.92
- B108.33Correct
- C106.18
Explanation
F0 = S0 × e^((r+c)T) = 100 × e^0.08 = 108.33. Subtracting storage costs gives e^0.04 = 104.08, and ignoring storage gives e^0.06 = 106.18.
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