The Spot Price of an Investment Asset Is $30 and the Risk-Free

question 3

Multiple Choice

The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding.The asset provides an income of $2 at the end of the first year and at the end of the second year.What is the three-year forward price?

• A) $19.67
• B) $35.84
• C) $45.15
• D) $40.50

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Definitions:

Mixed Cost

Costs that have both fixed and variable components and change in total with the level of activity, but not proportionately.

Machine-hour

A metric that quantifies the number of hours a machine is utilized to manufacture products during a specified timeframe.

High-low Method

An approach in managerial accounting that approximates variable and fixed costs by examining the maximum and minimum levels of activity.

Inspection Costs

Expenses associated with the activity of checking and verifying the quality or specifications of goods or services.