Final answer:
The four-year forward price of an investment asset with a spot price of $325 and a risk-free rate of 6.25% with continuous compounding is approximately $417.31. This calculation is based on the formula for forward price in a continuously compounded interest rate environment.
Step-by-step explanation:
The subject of the student's question pertains to the calculation of a four-year forward price for an investment asset, using the given spot price and the risk-free rate with continuous compounding. The formula to find the forward price F, given a spot price S, risk-free rate r, and time in years t, is F = S * e^(rt), where e is the base of the natural logarithm. In this case, the spot price S is $325, the risk-free rate r is 6.25% or 0.0625 when expressed as a decimal, and time t is 4 years.
Using the formula, the calculation would be:
F = 325 * e^(0.0625 * 4)
Without rounding intermediate results, the answer would produce:
F ≈ 325 * e^(0.25) ≈ 325 * 1.28403 ≈ $417.31
This means the four-year forward price of the asset, assuming no income is provided during the period, is approximately $417.31.