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

Which statement about the relationship between futures prices and expected future spot prices is correct under the CAPM-based view?

With positive systematic risk, the futures price is below the expected spot price. The asset's required return exceeds the risk-free rate, so F0 = E(ST)e^(−(k−r)T) is less than E(ST); only zero beta gives equality.

  1. AThe futures price always equals the expected spot price
  2. BIf the underlying has positive systematic risk (positive beta), the futures price is below the expected spot priceCorrect
  3. CIf the underlying has positive beta, the futures price is above the expected spot price
  4. DThe futures price is below the expected spot price only when the underlying has negative beta

Explanation

Futures price F0 = E(ST) e^(−(k−r)T), where k is the required return on the asset. With positive beta, k > r, so F0 < E(ST) (normal backwardation-like). Zero beta gives equality, and negative beta gives F0 > E(ST).

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