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Basic Question 3 of 5
The options and a forward contract expire in 90 days. The continuously compounded risk-free rate is 5%, and the exercise price is 75. The call price is 5.5, and the put price is 9.2. What is the forward price?
User Contributed Comments 5
| User | Comment |
|---|---|
| sharapov | continuous compounding usually involves an exponent function |
| PhiWong | How to determine whether it is a short or long forward from the question? |
| bmeisner | I thought we had to bring this back to discrete interest rate so I used exp(.05) as r. It doesn't change the answer much, i get 71.254. Is the r for forwards discrete or continuous in this case? I thought since it is (1+r)^T that it implied discrete interest rates... |
| Smiley225 | good obvervation bmeisner. The question says "continuously compounded risk-free rate" On the whole i am not sure when to use discrete or continuous....i am aware that one must use either or but not a combination of both.....suggestions anyone? |
| Logaritmus | Usually in derivativative models we use exponents but it depends on discount factor. From my point of view continious compounding is determined by DF(T)=exp(-rT) [remind: discount factor is PV of 1 at time T]. Especially in option pricing. But usually daily compounding is very close to continious compounding. |
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Learning Outcome Statements
explain put-call forward parity for European options
CFA® 2025 Level I Curriculum, Volume 5, Module 9.