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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 asset trades at a spot price of 80 and pays no income. The annual risk-free rate is 5% with annual compounding. The no-arbitrage price of a one-year forward contract on the asset is closest to:

The forward price is about 84.00. With no income on the asset, the forward price equals the spot price compounded at the risk-free rate: 80 × 1.05 = 84. Paying 80 today and financing it for a year costs the same as the forward.

  1. A80.00
  2. B84.00Correct
  3. C88.00

Explanation

F0 = S0 × (1 + r)^T = 80 × 1.05 = 84.00. The option 80.00 ignores the cost of financing the purchase. The option 88.00 does not reconcile to any consistent calculation here.

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