Page 24 - FINAL CFA II SLIDES JUNE 2019 DAY 10

LOS 39.a: Describe and compare how equity, interest rate, fixed-
income, and currency forward and futures contracts are priced READING 39: PRICING AND VALUATION OF FORWARD COMMITMENTS
and valued.
LOS 39.b: Calculate and interpret the no-arbitrage value of
equity, interest rate, fixed-income, and currency forward and MODULE 39.2: PRICING AND VALUATION OF EQUITY FORWARDS
futures contracts.

Equity Forward Contracts With Discrete Dividends
Adjust spot for PVD or adjust Forward price for FVD

For equity contracts, use a 365-day basis for calculating T. For example, if it is a 60-day contract, T = 60 / 365.

EXAMPLE: Calculating the price of a forward contract on a stock: Calculate the no-arbitrage forward price for a 100-day
forward on a stock that is currently priced at $30.00 and is expected to pay a dividend of $0.40 in 15 days, $0.40 in 85 days, and
$0.50 in 175 days. The annual risk-free rate is 5%, and the yield curve is flat.

Ignore the dividend in 175 days because it occurs after the
maturity of the forward contract.