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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?

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jeff jeffy answered 1 year ago
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