Louis plans to buy two-month Treasury Bills in four months.Currently the price on six-month Treasury Bills is $962,456 per million.The risk-free rate is 5.2%.What is the fair forward price per $1 million?

Question

Quizplus · Accepted Answer

The correct answer is A.The fair forward price per $1 million is $1,007,459. This is because the forward price is equal to the spot price multiplied by the forward rate. The forward rate is equal to the risk-free rate plus the forward premium. The forward premium is equal to the difference between the forward price and the spot price. In this case, the spot price is $962,456 per million and the risk-free rate is 5.2%. Therefore, the forward premium is $1,007,459 - $962,456 = $45,003. The forward rate is therefore 5.2% + $45,003/$962,456 = 5.252%.

Louis Plans to Buy Two-Month Treasury Bills in Four Months