Question

# The spot price of an investment asset is \$50 and the risk-free rate for all maturities...

1. 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 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

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