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Exam 2016-FRR Topic 1 Question 236 Discussion

Actual exam question for GARP's 2016-FRR exam
Question #: 236
Topic #: 1
Which one of the following four relationships should be used to price equity forwards or futures?

Suggested Answer: C Vote an answer

The correct formula for pricing equity forwards or futures involves the market equity price adjusted by the cost of carry, which includes the risk-free rate and the expected dividend rate. The formula is:
Equity forward or futures price=market equity price×(1+risk-free rate#expected dividend rate)
#Equity forward or futures price=market equity price×(1+risk-free rate#expected dividend rate)t
* Market Equity Price: This is the current price of the equity in the market.
* Risk-Free Rate: This represents the return on an investment with no risk, typically the yield on government bonds.
* Expected Dividend Rate: This is the rate at which dividends are expected to be paid out, expressed as a percentage of the market price.
* Time (t): This is the time to maturity of the forward or futures contract, usually expressed in years.
The formula accounts for the cost of financing the equity position (risk-free rate) and adjusts for the income from the equity (expected dividends). The multiplication and exponentiation reflect the compounding effect over the period#t.
References
* How Finance Works.pdf, p. 206

by Celeste at Jun 11, 2025, 03:14 AM

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