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A stock is expected to pay a dividend of $1.25 per share in two months and...

A stock is expected to pay a dividend of $1.25 per share in two months and in five months. The stock price is $127, and the risk-free rate of interest is 5% p.a. with continuous compounding for all maturities. An investor has just taken a long position in a six-month forward contract on the stock.

a) What are the forward price and the initial value of the forward contract?

b) Three months later, the price of the stock is $135 and the risk-free rate of interest is still 5% p.a. What are the forward price and the value of the long position in the forward contract?

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jeff jeffy answered 1 year ago
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