Question

- The spot price of an investment asset is $50 and the risk-free rate for all maturities is 8% 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) $56.32 B) $59.03 C) $53.55 D) $57.31

Answer #1

**The three year forward price is computed as shown
below:**

**= Spot price x e ^{risk free rate x 3} - $ 2 x e
^{risk free rate x 1} - 2 x e ^{risk free rate x
2}**

= $ 50 x 2.71828 ^{0.08 x 3} - $ 2 x 2.71828 ^{0.08 x
1} - $ 2 x 2.71828 ^{0.08 x 2}

= $ 50 x 2.71828 ^{0.24} - $ 2 x 2.71828 ^{0.08}
- $ 2 x 2.71828 ^{0.16}

= $ 50 x 1.271248945 - $ 2 x 1.083287009 - $ 2 x 1.173510745

**= $ 59.03 Approximately**

**So, the correct answer is option B.**

Feel free to ask in case of any query relating to this question

The spot price of an investment asset is $50 and the risk-free
rate for all maturities is 8% 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)
$56.32
B)
$59.03
C)
$53.55
D) $57.31

The spot price of an investment asset is $30 and the risk-free
rate for all maturities is 10% with continuous compounding. The
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(Hint: First find the PV of year 1 and year 2 incomes and then
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