Financial Risk Manager Part 1

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Explanation:

The price of a forward contract when the underlying pays a dividend is given by:

$F = S \left( \frac{1 + r}{1 + q} \right)^T$

where:

S = current asset price
r = risk-free rate
q = dividend yield paid by the underlying asset expressed on a per annum basis
T = time to maturity (in years) of the forward contract

The price of the forward contract is:

$\`$95` \left( \frac{1.06}{1.035} \right)^{0.5 \times 2} = \`$97.29`$

Note: Since both rates are compounded semi-annually, we use the semi-annual rates directly (r = 12%/2 = 6%, q = 7%/2 = 3.5%), and T = 0.5 × 2 = 1 year of semi-annual periods.

Explanation:

The price of a forward contract when the underlying pays a dividend is given by:

$F = S \left( \frac{1 + r}{1 + q} \right)^T$

where:

S = current asset price
r = risk-free rate
q = dividend yield paid by the underlying asset expressed on a per annum basis
T = time to maturity (in years) of the forward contract

The price of the forward contract is:

$\`$95` \left( \frac{1.06}{1.035} \right)^{0.5 \times 2} = \`$97.29`$

Note: Since both rates are compounded semi-annually, we use the semi-annual rates directly (r = 12%/2 = 6%, q = 7%/2 = 3.5%), and T = 0.5 × 2 = 1 year of semi-annual periods.

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Q.672 George Brown, a fixed-income investment analyst, is determining the price of a 6-month forward contract on a unique asset. The risk-free rate of interest is 12% per year, compounded semi-annually, whereas the dividend yield on the asset is 7% p.a. with semi-annual compounding. If the asset price is `$95`, then what is the price of the forward contract?

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UAnonymous

Last updated: July 21, 2026 at 02:10

$100.8

$97.29

$93.96

$96.13