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A stock is expected to pay a dividend of $1 per share in two months and...

A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock.
Required

  1. What are the forward price and the initial value of the forward contract?
  2. Three months later, the price of the stock is $48 and the risk-free rate of interest is still 8% per annum. What is the forward price and the value of the short position in the forward contract?

Solutions

Expert Solution

Given, Dividend per share = $1

Stock Price(S) = $50

Risk free rate of interest(r) = 8% or 0.08

The other values of 'e' raise to power rT can be calculated using above procedure.

jeff jeffy answered 8 months ago
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