The spot price of an investment asset is $55 and the risk-free rate for all maturities...

The spot price of an investment asset is $55 and the risk-free rate for all maturities (with continuous compounding) is 4%, and the asset provides an income of $3 at the end of each year. (12pts.) a. What is the two year forward price? (6pts.) b. What is the value of this two-year forward contract with a delivery price of $40? (6pts.)

Solutions

Expert Solution

A) Forward price after 2 year = Stock price today + Interest - Income on Asset at T=2

Forward price = 55 * (e^.08) - (3 + 3(e^0.04))

= 55 * 1.0832 - (3 + 3*1.0408)

= 59.57 - 6.12

= 53.45

2 year forward price = $53.45

B) As the current delievery price is $40 only, the forward price is traded at discount as the intrinsic value of 2 year forward contract is $53.45

jeff jeffy answered 2 years ago

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