2

in real markets and describe their payoff structures in mathematical terms. 2. (20pt) Consider a forward contract whose underlying assets incur continuous income with rate q. We assume that the interest rate r and income rate q are continuously compounded. Derive the following formula: Fo = Soer-9)T where Fo is the forward price, So is the initial price of the underlying asset, and T is the maturity of the forward contract. Hint: note that if an investor acquires e-qT shares of the asset at time 0 and do the continuous imme- diate reinvestment of income, he/she owns exactly one share of the asset at time T. 11 T