Suppose XYZ stock is trading at 20. Suppose the effective annual interest rate is 5%, so...

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Suppose XYZ stock is trading at 20. Suppose the effective annual interest rate is 5%, so...

Suppose XYZ stock is trading at 20. Suppose the effective annual interest rate is 5%, so that 100 dollars lent for 1 year will return 105 dollars. What is a fair 1-year forward price for XYZ stock?

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Answer 1

Answer #1

A fair forward price is the no-arbitrage expected future price of a stock, which does not allow for any arbitrage.

Current Stock Price = $ 20 and Effective Annual Interest Rate = 5 %,

No-Arbitrage Fair 1-year Forward Price = Current Price x (1+Effective Annual Interest Rate) = 20 x (1.05) = $ 21

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Answer 2

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