Question

In: Finance

A stock provides dividend of $1 at the end of the first, second, and third year,...

A stock provides dividend of $1 at the end of the first, second, and third year, its spot price is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%.

What is the four year forward price?

What is the value of this forward contract two years later if the forward price at that time is $40?

Solutions

Expert Solution

Stock Price: $30

Dividend Per Year = $1

Interest Rate = 10%

Time to Maturity = 4 Years

Now, for finding the forward price, we need to find out the present value of dividend.

Year Dividend Present Value Factor    Present Value

1 $1 0.905 $0.905

2 $1 0.819 $0.819

3 $1 0.741 $0.741

Total Present Value of Dividends $2.464

For calculating forward price,

Forward Price =

Forward Price =  

Forward Price = $41.08

Four Year Forward Price should be $41.08.

Value of Forward Contract = Forward Price 2 Years later - Forward price at Time t = 0

Value of Forward Contract = 40 - 41.08 = - $1.08

Value of forward contract should be - $1.08.

jeff jeffy answered 2 years ago
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