Question
3. A one-year-long forward contract on a non-dividend-paying stock is written when the stock price is $100 and the risk-free interest rate, quoted with the
3. A one-year-long forward contract on a non-dividend-paying stock is written when the stock price is $100 and the risk-free interest rate, quoted with the standard bond market convention of semi-annual compounding, is 4% per annum. (a) What are the forward price and the initial value of the forward contract?
(b) Six months later the stock price is $110 and the risk-free interest rate is still 4%. What is the new market forward price for forward contracts with the same delivery date (i.e., for forwards with delivery in 6 months)?
(c) If you had bought a one-year forward contract six months earlier for delivery at the then prevailing forward price (i.e., with a delivery price equal to your answer to part a), what is the current value of this forward contract (signed 6 months ago) given the current price of the underlying stock?
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