Question

The spot price of an investment asset is $25 and the risk-free rate is 8%, 8.5% and 9.5% for one-year-, two-year- and three-year-maturity, respectively. The asset provides an income of $4 at the end of the first year and at the end of the second year. What is the three-year forward price?

Answer 1

Answer: $33.24

Explanation: Forward price is the predetermination of the price of a present product now for a predetermined price in the nearest future.

It is calculated thus:

F= S x e^(r*t)

F=Spot rate * 2.7183^(risk free rate * time)

F= 25 * 2.7183 ^(9.5% * 3)

F= 25 * 2.7183^ (0.095*3)

F=25 * 2.7183^(0.285)

F= 25* 1.32976

F=33.24