Value of Equity Forward Contract after 3 months.

CFA Level II
#1

Hey, This is based on EOC 7 in Reading 40. I do not understand why my answer is not correct.

Information:

  • 9 month forward contract. What is the value after 3 months?
  • "Assuming annual compounding" - does this affect the formula I have used for my answer?
  • Initial Value of Forward contract: 250.5623
  • Current Stock Price: 245
  • One remaining dividend of 1.5 to paid 3 months before expiration of contract.
  • Rf: 0.325%

My Calculation:

I am using this formula in Schweser

Value of an Equity forward: (S1 - PVdiv) - ( FP/ (1+rf)^time to maturity).

  • S1: 245
  • PV div: 1.5/(1+(0.00325^0.25) = 1.210883
  • (SI - PVdiv) = 243.7892
  • FP: 250.5623 / (1+(0.00325^0.5) = 237.04844.
  • PV of the long call: 243.7892 - 237.04844 = 6.740719.

However it says that the correct answer should be: -6.6549

Where do I go wrong here? Have I misunderstood something?

#2

I figured it out myself after a lot of back and forth. 1.5/(1+(0.00325^0.25) = 1.210883 --> Should be: 1/1.00325^0.25.

FP: 250.5623 / (1+(0.00325^0.5) = 237.04844 --> Should be FP: 250.5623 / (1.00325^0.5). That gave me the correct answer. Good to make that mistake now, rather than on the exam! :slight_smile:

Is there any other calculations in derivatives where discount rates are calculated in the way I did in my first post that I might be mixing up with?