The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding.The asset provides an income of $2 at the end of the first year and at the end of the second year.What is the three-year forward price?
A) $19.67
B) $35.84
C) $45.15
D) $40.50

Question

Quizplus · Accepted Answer

The present value of the income is 2e^-0.1×1+2e^-0.1×2= $3.447.The three year forward price is obtained by subtracting the present value of the income from the current stock price and then grossing up the result for three years at the risk-free rate.It is (30−3.447)e^0.1×3= $35.84.

The Spot Price of an Investment Asset Is $30 and the Risk-Free