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Basic Question 1 of 7
John has an asset that is worth $110. He plans to sell it in 8 months. The risk-free interest rate is 4.5%. Assume monthly compounding. What should the forward price be?
User Contributed Comments 14
| User | Comment |
|---|---|
| Bill12345 | Can you calculate this on calculator |
| business | Why do you get a different figure if you use (110*(1+0.045*8/12)^1. Which method is more accurate???? |
| business | Sorry you get 113.28. No difference. But if the figures are big there is a slight difference with this formular. |
| krunk | @Billy12345: no, you can't calculate it on a calculator, you can only answer this question using a super computer housed in BlackRock's nuclear-proof bunkers. You are not allowed to bring it into the exam. |
| robertucla | ^+1 |
| assiduous | Why are we dividing 8 by 12? If it is monthly compounding we should be dividing .045 by 12. Hence, [1+(.045/12)]^8 * 110 = 113.34 Roughly the same answer but for learning purposes (and less confusion) its probably better to stick with the principles of compounding. |
| farhan92 | N = 8/12 I/Y = 4.5% PV=110 CPT FV =113.28 |
| maggiew | Second assiduous. |
| Fabulous1 | Yes, I also approve addiduous message |
| cfastudypl | I used the same method as assiduous but AN method is better. |
| Inaganti6 | Monthly compounding means raised to the power not simple multiplication....which results in 113.34 as ASSIDUOUS explained... compounding means raised to the power always...hard and fast rule but I don't see why 113.28 should make sense. |
| Sagarsan88 | PV 110 I/Y 4.5/12 N 8 Cpt FV Ans 113.34 |
| JNW1980 | @assiduous I got the same answer. You are correct. |
| JNW1980 | Some of these questions are really good. Other ones contain really stupid errors. |
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Learning Outcome Statements
explain how the value and price of a forward contract are determined at initiation, during the life of the contract, and at expiration
CFA® 2024 Level I Curriculum, Volume 5, Module 5.