Question

In: Finance

An investor has just taken a short position in a one-year forward contract on a dividend...

An investor has just taken a short position in a one-year forward contract on a dividend paying stock. The stock is expected to pay a dividend of $2 per share in five months and in eleven months. The stock price is currently selling for $100 and the risk-free rate of interest is 8.50% per year with continuous compounding for all maturities.
a.  What are the forward price and the initial value of the forward contract? The forward price is (sample answer: $75.50) and the initial value is (sample answer: $75.50)
b. Six months later, the price of the stock is $105 and the risk-free rate stays the same. What are the forward price and the value of the position in the forward contract? Now the forward price is (sample answer: $75.50) and the initial value is (sample answer: +$5.50; or -$5.50)

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

An investor has just taken a short position in a one-year forward contract on a dividend...
An investor has just taken a short position in a one-year forward contract on a dividend paying stock. The stock is expected to pay a dividend of $2 per share in five months and in eleven months. The stock price is currently selling for $100 and the risk-free rate of interest is 8.50% per year with continuous compounding for all maturities. a. What are the forward price and the initial value of the forward contract? The forward price is (sample...
On date 0, an investor starts a short position in one futures contract on Bitcoin. One...
On date 0, an investor starts a short position in one futures contract on Bitcoin. One contract is for delivery of 5 Bitcoins. Following are the future prices on subsequent dates. What is the cumulative gain for the investor from date 0 through date 5? Assume that the risk-free rate is zero. Date Bitcoin futures price ($ per 1 Bitcoin) 0 11,410 1 11,784 2 12,005 3 11,568 4 11,235 5 10,912
In October 2018, an investor entered a short position in forward on crude oil for delivery...
In October 2018, an investor entered a short position in forward on crude oil for delivery in October 2021. At that time, the spot price of crude oil was $70 per barrel and the risk-free rate of interest was 2% per annum. Currently, in October 2020, the spot price of crude oil is $40 per barrel and the risk-free rate of interest is 1% per annum. What is the value of the short position in the forward? A)30 B)32.78 C)33.59...
A short forward contract on an asset plus a long position in a European call option...
A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to a)A short position in a call option b)A short position in a put option c)A long position in a put option d)None of the above
Use (European) options, how to replicate (the payoff of) a short position in a forward contract...
Use (European) options, how to replicate (the payoff of) a short position in a forward contract with delivery price K?
A 9-month short position of a forward contract on a stock is entered into today, when...
A 9-month short position of a forward contract on a stock is entered into today, when the stock price is $60. The stock has expected dividends of $1.0 in 2 months, $2.0 in 5 months, and $2.0 in 7 months respectively. The risk-free interest rate is 3.0% per annum with continuous compounding. (a) What is the forward price today? (b) What is the initial value of the forward contract today? (c) 3 months later, the price of the stock decreases...
An investor enters into a short 3 months’ forward contract to sell 100,000 British pounds for...
An investor enters into a short 3 months’ forward contract to sell 100,000 British pounds for US dollars. Table 2 Spot and forward quotes of the USD/GBP exchange rate Maturity Bid Offer Spot 1.2732 1.2736 1-month forward 1.2746 1.2751 3-month forward 1.2772 1.2777 1-year forward 1.2883 1.2889 Use Table 2 to indicate how much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.25 (b) 1.30 (c) Explain what is meant...
An investor wishes to purchase a 1-year forward contract on a risk-free bond which has a...
An investor wishes to purchase a 1-year forward contract on a risk-free bond which has a current market price of £97 per £100 nominal. The bond will pay coupons at a rate of 7% per annum half-yearly. The next coupon payment is due in exactly 6 months, and the following coupon payment is due just before the forward contract matures. The 6-month risk-free spot interest rate is 5% per annum effective and the 12-month risk-free spot interest rate is 6%...
What is the payoff to a short forward position if the forward price is $60 and...
What is the payoff to a short forward position if the forward price is $60 and the underlying stock price at expiration is $73? What would be the payoff to a purchased put option with a strike price of $60 on the same underlying stock expiring at the same time?
A forward contract on a non-dividend paying stock trades at 1,200. This forward contract matures 1...
A forward contract on a non-dividend paying stock trades at 1,200. This forward contract matures 1 month from now. A second forward contract on the same stock trades at 1,220 and expires 3 months from now. Suppose perfect market and a continuously compounding interest rate which will remain same over the next 6 months. 1. What is the spot price of the underlying asset today? 2. Now, suppose there is a third forward contract, expiring in 4 months and trading...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT