Question

Consider a 2-year forward on a stock index. The current value of the index is 2,500. The risk-free interest rate is 4% per annum, and the dividend yield on the stock index is 3% per annum. What is the 2-year forward price?

Answer 1

Forward price=Current value of Index*(e^((Rf-Dy)*T))

Rf=risk free rate=4%

Dy=Dividend yield=3%

T=2 years

Forward price=2500*(e^((4%-3%)*2))=2500*(2.71828^(0.02))=2500*1.020201=2550.50

Forward price=$2550.50