Question

The spot price of an investment asset that provides an income of $2 at the end of the first year and $2 at the end of the second year is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. The three-year forward price is:

Answer 1

Step-by-step explanation:

Calculation of three year forward price :

Present value of income from an investment asset

2 * e^(-0.1 * 1) + 2 * e^(-0.1 * 2)

= 2e^(-0.1) + 2e^(-0.2)

= 2 * 0.9048 + 2 * 0.8187

= 1.8096 + 1.6374

= $ 3.447

Three year forward price = (30 - 3.447) * e^(0.1 * 3)

= 26.553 * e^0.3

= 26.553 * 1.3499

= $ 35.84