The value of the S&P 500 Index is 1,260. The continuously compounded risk-free rate is 5.4 percent and the continuous dividend yield is 3.5 percent. Calculate the no-arbitrage price of a 160-day forward contract on the index. A) $562.91. B) $1,310.13. C) $1,270.54. D) $1,953.19. I just thought this one would be fun.
C
FP = 1260* e^[(0.054 - 0.035)*(160/365)]
Dinesh In case of forwards, forward rate agreements = 360 days convention and for rest of them 365 days.
yep c for me 2
if u use 360 or 365 the answer isnt that different where you can still get C, BUT… i feel like on the real test they would put those two choices (i.e. putting 1270.54 and 1270.60) gotta remember which to use…
C. with dinesh’s formula
Thanks kabhi!! @mike - very true the answer will not change much, but the act of not remembering the exact year-multiplier caused irritation and anxiety after a dumb-fried weekend of all studying and no play, which let me to tear open the derivative book. Btw, I am so scared these days that even a baby kitten can purrr me off…
agree with C
C - Finally, some things are starting to stick in my head!
C it is. Good job guys. The 365 vs. 360 threw me off for a second as I needed to remember which one to use. I tried both and luckily only one of the answers was there, otherwise I would have just guessed.
So CFAI is telling us that they need to change the format of the exam, because it’s hard to come up with four reasonable choices. Then they throw a question like this at you with answer A). This doesn’t pass the ‘my mother’ test, i.e., Joey: “Mom, would you like to enter into a contract to buy the S&P in 6 months at less than half its current value?” Joey’s Mom: “F-ing A, yeah! Stupid charterholders”. Idiots.