Question

In: Finance

Consider a 1-year forward contract on a stock with a price of $51. The current price...

Consider a 1-year forward contract on a stock with a price of $51. The current price of the stock is $50. A cash dividend payment of $2 per share is anticipated in 9 months. The interest rate is 3% per annum with continuously compounding. Assume that there are no transaction costs.

(a) Determine the fair price and the initial value of the forward contract today.

(b) Is there any arbitrage opportunity? Verify your trading positions taken at each point in time.

(c) After 10 months, the stock price falls 2% and the interest rate remains unchanged. Calculate the value of the forward contract. What is the mark-to-market?

Solutions

Expert Solution

Solution:

Formula:


# Please upvote if the solution helps.

# You may use comments section to revert with additional queries if you have or if I have missed out on any aspect of your question

Thanks !

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Consider a 1-year forward contract on a stock with a price of $51. The current price...
Consider a 1-year forward contract on a stock with a price of $51. The current price of the stock is $50. A cash dividend payment of $2 per share is anticipated in 9 months. The interest rate is 3% per annum with continuously compounding. Assume that there are no transaction costs. (a) Determine the fair price and the initial value of the forward contract today. (b) Is there any arbitrage opportunity? Verify your trading positions taken at each point in...
Consider a 2-year forward contract on a non-dividend-paying stock. The current stock price is $500. The...
Consider a 2-year forward contract on a non-dividend-paying stock. The current stock price is $500. The forward price is $520, and the risk-free interest rate is 5% per annum. Is there an arbitrage? If so, what is the arbitrage profit today? (Consider an arbitrage strategy where we long or short the forward on one share of the stock and the net cash flow in year 2 is zero)
Question 1 (20 marks) Consider a 1-year forward contract on a stock with a price of...
Question 1 Consider a 1-year forward contract on a stock with a price of $51. The current price of the stock is $50. A cash dividend payment of $2 per share is anticipated in 9 months. The interest rate is 3% per annum with continuously compounding. Assume that there are no transaction costs. (a) Determine the fair price and the initial value of the forward contract today. (b) Is there any arbitrage opportunity? Verify your trading positions taken at each...
Consider a 6-month forward contract on a stock whose current price is $40. The stock will...
Consider a 6-month forward contract on a stock whose current price is $40. The stock will not pay any dividend, and the risk-free interest rate is 4% per annum. The forward price of the stock is $43. Is there an arbitrage? If so, show the arbitrage strategy and resulting cash flows.
The current spot price of Amazon stock is $1,823 the current 1-year forward price is $1,944....
The current spot price of Amazon stock is $1,823 the current 1-year forward price is $1,944. The current 1-year risk free rate is 6.5% per annum with semiannual compounding. If there is a $20 transaction fee for the combination of all transactions made, paid today, can you make an arbitrage profit with 100 shares? If there is an arbitrage how much would you make? Otherwise prove that there is not an arbitrage.
Consider a 3-year forward contract on stock. The stock will pay $5-dividend every year in years...
Consider a 3-year forward contract on stock. The stock will pay $5-dividend every year in years 1 through 3 and currently sells for $80. The forward will expire right after the stock’s dividend payment in year 3. The forward price is $78, and the risk-free interest rate is 4% per annum. We want to make an arbitrage such that net cash flow in year 3 is positive and net cash flows from year 0 through year 2 are zero. In...
Consider a 3-year forward contract on stock. The stock will pay $5-dividend every year in years...
Consider a 3-year forward contract on stock. The stock will pay $5-dividend every year in years 1 through 3 and currently sells for $80. The forward will expire right after the stock’s dividend payment in year 3. The forward price is $78, and the risk-free interest rate is 4% per annum. We want to make an arbitrage such that net cash flow in year 3 is positive and net cash flows from year 0 through year 2 are zero. In...
Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock...
Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock price is $50 and the risk-free interest rate is 10% p.a. It is also known that the stock will pay a $3 dividend at the end of year 1. The current settlement price for the futures contract is $51. Set up a strategy for an arbitrage profit. What are the initial and terminal cash flows from the strategy? Assume that investors can short-sell or...
1. Consider a forward contract for one share of a stock, with T = 0.5 (6...
1. Consider a forward contract for one share of a stock, with T = 0.5 (6 months). The current stock price is S0 = 50. We assume that the risk-free interest rate is r = 0.05, and that the stock pays discrete dividends, there being exactly one dividend payment, of size 0.75, between times 0 and T, and the payment happens at time t = 1/3 (4 months). Calculate the price of the forward contract. Show your work. Use two...
Consider a 2-year forward on a stock index. The current value of the index is 2,500....
Consider a 2-year forward on a stock index. The current value of the index is 2,500. The risk-free interest rate is 4% per annum, and the dividend yield on the stock index is 3% per annum. What is the 2-year forward price?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT