Question #75
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 31
Status: Unattempted
Question
An index is currently 965 and the continuously compounded dividend yield on the index is 2.3%. What is the no-arbitrage price on a one-year index forward contract if the continuously compounded risk-free rate is 5%.
Answer Choices:
A. 991.1
B. 987.2
C. 991.4
Explanation
The futures price FP = S0e-δT (eRT)
= S0e(R-δ)T
= 965e(.05-.023)
= 991.4