The spot price of an asset is $50.The expected return on the asset is 10% a year (in simple terms)and the standard deviation of these returns is 20%.The risk-free rate of interest is 5% a year in simple terms.Assuming no costs or benefits of carry,what is the one-year forward price of the asset?
A)$52.50
B)$55.00
C)$57.50
D)$60.00

Question

Quizplus · Accepted Answer

The correct answer is A.The one-year forward price of the asset is $52.50. This is because the forward price is equal to the spot price plus the expected return on the asset minus the risk-free rate of interest. In this case, the spot price is $50, the expected return on the asset is 10%, and the risk-free rate of interest is 5%. Therefore, the forward price is $50 + 10% - 5% = $52.50.

The Spot Price of an Asset Is $50