Question

In: Finance

A stock is expected to pay a dividend of €2 per share in 9 months. The...

A stock is expected to pay a dividend of €2 per share in 9 months. The stock price is €20, and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. An investor has just taken a long position in a 12-month forward contract on the stock. What is the Forward price (K)?

Expert Solution

Share Price as on Today: €20 per share

Expected dividend: €2 per share in 9 months

Risk-free rate of interest: 5% per annum with continuous compounding.

Price of the forward contract: Future value of the share price + Future value of the dividend paid in 9th month

Price of the forward contract: (€20 * e^0.05*12/12 ) + (€2 * e^0.05*3/12 )

We know that the value of e = 2.71828 and will calculate dirty power for calculating value.

Price of the forward contract: (€20 * 1.05127) + (€2 * 1.01257)

Price of the forward contract: € 21.02 + € 2.02

Price of the forward contract: € 23.04

Hence, the Forward price is € 23.04

_______________________________END___________________________________

Hi mate,

In case of any doubt, please do comment. I will consider myself fortunate if I can help you.

Please provide your valuable feedback and hit like if you are satisfied with the solution provided.

All the best for your bright future.

Be safe from Covid-19.

Thank You

jeff jeffy answered 1 year ago

A stock is expected to pay a dividend of $2 per share in three months. The...

A stock is expected to pay a dividend of $2 per share in three months. The share price is $75, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a long position in a six-month forward contract on a share of stock. a) What are the forward price and the initial value of the forward contract? b) Three months later, immediately after the payment of the dividend, the...

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...

A stock is expected to pay a dividend of $1.50 per share in three months and...

A stock is expected to pay a dividend of $1.50 per share in three months and in six months. The stock price is $60, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a nine-month forward contract on the stock. What are the forward price and the initial value of the forward contract? Three months later, the price of the stock is $55 and...

A stock is expected to pay a dividend of $1.5 per share in three months and...

A stock is expected to pay a dividend of $1.5 per share in three months and in six months. The stock price is $80, and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. An investor has just taken a long position in a eight-month forward contract on the stock. (a) What are the forward price and the initial value of the forward contract? (b) Four months later, the price of the stock is...

A stock is expected to pay a dividend of $0.80 per share in two months, in...

A stock is expected to pay a dividend of $0.80 per share in two months, in five months and in eight months. The stock price is $35, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. You have just taken a long position in a nine-month forward contract on the stock. Seven months later, the price of the stock has become $38 and the risk-free rate of interest is still 8% per annum....

A stock is expected to pay a dividend of $1 per share in two months and...

A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. Required What are the forward price and the initial value of the forward contract? Three months later, the price of the stock is $48...

(A) ATX stock is expected to pay dividend of AUD 1 per share in three months...

(A) ATX stock is expected to pay dividend of AUD 1 per share in three months and AUD 1.50 per share in five months. The ATX stock price is AUD 55 and the risk-free interest is 8% per annum with continuous compounding for all maturities and Mr. Brown has taken a short position in a six-month forward contract. (i) What is the initial value of the forward contract? (ii) What is the forward price of this forward contract (B) Three...

A stock is expected to pay a dividend of$1 per share in 3-month and in 9-month....

A stock is expected to pay a dividend of$1 per share in 3-month and in 9-month. The stock price is$80. An investor has just taken a long position in a 12-month futures contract on the stock. The zero ratesfor 3-, 6-, 9-, 12-month are 5%, 5.5%, 6% and 6.5% per annum with continuous compounding, respectively.6-month later, the stock price is$82. The zero rates happen to be the implied forward rates 6-month ago.What is the value of the long position in...

A stock is expected to pay a dividend of $0.70 per share in one month, in...

A stock is expected to pay a dividend of $0.70 per share in one month, in four months and in seven months. The stock price is $30, and the risk-free rate of interest is 7% per annum with continuous compounding for all maturities. You have just taken a short position in an eight-month forward contract on the stock. Six months later, the price of the stock has become $34 and the risk-free rate of interest is still 7% per annum....

A stock is expected to pay a dividend of $0.50 per share in two month, in...

A stock is expected to pay a dividend of $0.50 per share in two month, in five months and in eight months. The stock price is $20, and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. You have just taken a short position in a nine-month forward contract on the stock. Seven months later, the price of the stock has become $23 and the risk-free rate of interest is still 5% per annum....