Question

Question 2

Suppose you enter into a 4.0-month forward contract on one ounce of silver when the spot price of silver is $9.0 per ounce and the risk-free interest rate is 6.5 percent continuously compounded. What is the forward price?

9.6044

9.1971

8.8071

11.672

Question 3

Pixar stock is expected to pay a single $1.7 dividend in 2.0 months. Suppose you enter into a 7.0-month forward contract to buy one share of Pixar stock when the share price is $40.4 per and the risk-free interest rate is 6.25 percent continuously compounded. What is the forward price?

37.331

40.155

43.645

40.137

Answer 1

Question 2:

Particulars	Amount
Spot Price	$        9.00
Risk free rate	6.50%
Time in Months	4
Time in Years	0.3333

Forward Price = Spot price * e^rt
= $ 9 * e^(0.065*0.3333)
= $ 9 * e^0.0217
= $ 9 * 1.0219
= $ 9.1971
Question 3:

PV of First Div:
= First Div * e^-rt
= $ 1.7 * e^(-0.0625*0.1667)
= $ 1.7 * e^(-0.0104)
= $ 1.7 * 0.9896
= $ 1.68

Revised Spot Price = Spot Price - PV of Div
= $ 40.4 - $ 1.68
= $ 38.72

Forward Price = Revised Spot price * e^rt
= $ 38.72 * e^(0.0625*0.5833)
= $ 38.72 * e^(0.0365)
= $ 38.72 * 1.0371
= $ 40.1577

Option B is correct. Diff is due to rounding off diff.