Question
1. Suppose that on April 1 you entered into a short position in a forward contract that matures one year later. The underlying asset of
1. Suppose that on April 1 you entered into a short position in a forward contract that matures one year later. The underlying asset of the forward contract is a stock that is expected to pay out a dividend of 5 kr on June 1. When you entered the forward contract, the forward price was 100 kr, and the continuously compounded interest rate was 12% per annum for all maturities. Six months have now passed and the spot price is now 79 kr (interest rates are the same).
What is the value of your forward contract today?
2. Suppose that on May 1 you entered into a long position in a forward contract that matures nine months later. The underlying asset of the forward contract is a stock that is expected to pay out a dividend of 8 kr on July 1 and 3 kr on November 1. When you entered the forward contract, the stock price was 100 kr, and the continuously compounded interest rate was 5% per annum for all maturities. Seven months have now passed and the spot price is now 98 kr (interest rates are the same).
What is the value of your forward contract today?
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Solution 1 To calculate the value of the forward contract we need to take into account the current spot price of the underlying asset the forward pric...
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Investment Analysis and Portfolio Management
Authors: Frank K. Reilly, Keith C. Brown
10th Edition
538482109, 1133711774, 538482389, 9780538482103, 9781133711773, 978-0538482387
