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

An index is at 2,000 and pays a continuous dividend yield of 2% per year. The continuously compounded risk-free rate is 5%. What is the fair 9-month forward price?

With a continuous dividend yield, the forward price is spot times e raised to (risk-free rate minus yield) times maturity. Here that is 2,000 times e^0.0225, about 2,045.5. Ignoring the yield would overstate the forward, and adding it would overstate further.

  1. A2,045.5Correct
  2. B2,068.2
  3. C2,030.0
  4. D2,114.4

Explanation

F = S x e^((r-q)T) = 2000 x e^(0.03x0.75) = 2000 x e^0.0225 = 2000 x 1.022755 = 2,045.5. Using r alone gives 2,076.5 (ignoring yield), and using r+q gives a higher figure.

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