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FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures

An index is at 1,200 with a continuous dividend yield of 2% per year. The continuously compounded risk-free rate is 5%. What is the fair price of a 1-year forward on the index (nearest whole number)?

The forward price is about 1,236, from F0 = S0 e^((r−q)T) = 1,200 × e^0.03. Dividend yield reduces the cost of carry, so the price is below the 1,262 obtained when yield is ignored.

  1. A1,236Correct
  2. B1,200
  3. C1,262
  4. D1,224

Explanation

F0 = S0 e^{(r−q)T} = 1200 × e^{0.03} = 1200 × 1.030455 = 1,236.55, which rounds to 1,237 and is closest to 1,236 among the options. Using r alone gives 1,262. Subtracting rather than compounding gives 1,224 or similar.

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