Question says to "derive the price at time t of [a] forward contract, using the no-arbitrage principle". The answer uses a slightly different method than other questions which ask to "prove" the prices of calls and/or puts, whereby there are two portfolios constructed, and given their values are the same at time T, then their values are also the same at time t. However the above question uses a slightly different method. Is this because of the use of the word "derive" as opposed to "prove"? I have completed the question by constructing two portfolios and by showing their values are the same at time T, I deduced, using the principle of no-arbitrage, that the price of the forward contract is that in the answer. But the method was slightly different. Would I lose marks for something like this? Thanks
Hi your method sounds perfect to me and is exactly what I'd do. This seems to be what the examiners have done too, so I'm not sure what you mean by a "slightly different method". We need to allow for the effect of dividends on the portfolio that's holding the share - is that what you mean?
Thanks for your reply, Mike. I'm using the revision guides so I guess the solutions in there are slightly different. The main thing is the method that I'd used would get the marks, so you've answered my question Thanks.
