The current price of a medical company 's stock is 75 The expected value of the stock price in three years is 90 per share The stock pays no dividends You are also given (i) The risk free interest rate is positive (ii) There are no transaction costs (iii) Investors require compensation for risk The...

The current price of a medical company's stock is 75. The expected value of the stock price

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The current price of a medical company's stock is 75. The expected value of the stock price in three years is 90 per share. The stock pays no dividends.

Transaction Buy e-ST shares of stock Borrow S (0)e-ST Total Time 0 -S(O)e-ST +S(0) e-ST 0 Cash Flows Time T

You are also given:

(i) The risk-free interest rate is positive.

(ii) There are no transaction costs.

(iii) Investors require compensation for risk.

The price of a three-year forward on a share of this stock is X, and at this price an investor is willing to enter into the forward.

Determine what can be concluded about X.

(A) X

(B) X = 75

(D) X = 90

(E) 90

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Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:17 AM

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The current price of a medical company's stock is 75. The expected value of the stock price

Question:

Transaction Buy e-ST shares of stock Borrow S (0)e-ST Total Time 0 -S(O)e-ST +S(0) e-ST 0 Cash Flows Time T +S(T) -Fo,T=-S(O)e(r-8)T S(T) - FO,T

Step by Step Answer:

C Because th...View the full answer

Derivative Pricing

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