Hi there, I’m wondering about the formula in Schweser book 5 page 19 on the bottom regarding forwards on equity indexes. Why is the index spot St discounted (and also: why is the index spot discounted by the div yield only). Same question for the future price FP: why by RFR and why discounted?? Somehow I don’t get the rationale for this calculation when comparing to the way to calculate the forwards on single equities. Thx Tom

For the equity index dividend yield: underlying is equity index - which you do not own. Dividends are paid at that rate on the equity index. Since it is a continuously compounded yield, dividing by the e to the power of dividend yield makes the formula equal to how you remove the PV of Dividends on a regular stock. For the FX currency: [If you went with the no-arbitrage route - you would be borrowing domestic currency, buy foreign currency, lending it forward, converting to Domestic in the future, to see if you get an arbitrage profit, assuming you were long the Foreign currency forward contract]. dividing by (1+rdc) -> is removing the exchange rate borrowing effect… something like that. you are borrowing and receiving funds in the other currency. The way I remember this: F=S*(1+RdC)/(1+rFC) --> formula for calculating Forward from Spot when Currencies are DC/FC (or FC:DC). now hence S/(1+rFc) - F/(1+Rdc)