CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
An equity index pays no dividends and the risk-free rate is positive. Ignoring transaction costs, the no-arbitrage forward price of a forward contract on the index, relative to the spot price, is most likely:
The forward price is most likely above the spot price. With no dividends and a positive risk-free rate, the no-arbitrage forward equals spot compounded at the risk-free rate, so deferring payment is worth the interest forgone on the spot amount.
- Aequal to the spot price
- Bbelow the spot price
- Cabove the spot priceCorrect
Explanation
With no benefits from holding the asset, the forward price is F0 = S0(1+r)^T. A positive rate means the forward price exceeds spot because the buyer defers payment, which is worth the interest on the spot price.
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