CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
Which condition is most likely required for a no-arbitrage futures price to be derived from the cost-of-carry model?
No-arbitrage futures pricing assumes the underlying can be purchased and held, with borrowing and lending at the risk-free rate and no frictions. It does not depend on investors' risk preferences or expectations about the future spot price, because replication fixes the price.
- AInvestors must share the same risk aversion and forecasts of the spot price.
- BThe underlying can be bought and held, and borrowing and lending occur at the risk-free rate.Correct
- CThe futures price must equal the expected spot price at expiration.
Explanation
Cost-of-carry pricing relies on replicating the futures payoff by buying the underlying with borrowed funds and holding it, with no restrictions or transaction costs. It does not depend on risk preferences or expected spot prices, so A and C are wrong.
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