Question #9
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 4
Status: Unattempted
Correct Answer: A
Question
The contract price of a forward contract is:
Answer Choices:
A. always the present value of the expected future spot price
B. determined at the settlement date
C. the price that makes the contract a zero-value investment at initiation
Explanation
The contract price can be an interest rate, discount, yield to maturity, or exchange rate.
The forward price is the future value of the spot price adjusted for any periodic payments
expected from the asset. An example of when the forward price may be less than the spot
price is in the case of an equity index contract where the dividend yield is greater than the
risk-free rate.