Comparing Forward Prices of Two Assets

This question contrasts the forward pricing of two real assets: one that is purely non-income-producing and another that throws off a predictable stream of cash flows. The candidate is asked to reason about which asset should command a higher forward price, given the same headline "value" today but very different income profiles. It is framed in intuitive, real-estate terms rather than bonds or equities, but the underlying logic is the same as in standard fixed-income and equity-derivative pricing. This kind of reasoning is common in entry-level quant, trading, and structuring interviews where interviewers want to see whether a candidate can move comfortably between narrative descriptions and pricing concepts.

The solution leans on the cost-of-carry model and the idea of net carry: financing cost versus income generated by the underlying. It tests understanding of how predictable interim cash flows affect forward prices, and whether the candidate correctly identifies which side of the trade benefits from those cash flows. Interviewers watch for clear articulation of assumptions, correct sign conventions for yields and carry, and the ability to explain the result in both formula-based and intuitive economic terms.

What it tests

The forward price of an asset is determined by the cost of carrying the asset to the future, which includes the opportunity cost of capital (such as interest rates) minus any income the asset generates during the holding period. This is formalized in the cost-of-carry model: for an asset with spot price $S$, risk-free rate $r$, continuous income yield $q$, and time $T$, the forward price is $F = S e^{(r-q)T}$. The key intuition is that any predictable cash flow (like dividends, coupons, or rental income) received before the contract's maturity reduces the need to pay as much in the future, since the holder benefits from these interim payments. Thus, assets that generate income have lower forward prices than otherwise identical assets that do not, because the buyer of the forward does not receive these interim cash flows.