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7 Pricing Forward Contracts (15 points total) For all cases below, assume that the risk-free one-year zero rate is 3.5% per annum with continuous compounding,

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7 Pricing Forward Contracts (15 points total) For all cases below, assume that the risk-free one-year zero rate is 3.5% per annum with continuous compounding, and that the delivery date is in one year. Also assume that current spot price of the underlying asset is $100. Find the price for the following contracts: (a) (2 points) A forward on a non-dividend paying stock. (b) (3 points) A forward on a stock paying exactly one dividend of $3 in 4 months, and no other dividends for the rest of the year. The 4 -month zero rate is 2% per annum with continuous compounding. (c) (3 points) A forward contract on an investment commodity that is costly to store. Suppose the storage costs for one year are $10 to be paid at the end of the year. (d) (3 points) A forward contract on a consumption asset with no income and no storage costs, but an estimated convenience yield of 2% per annum with continuous compounding. 1 This is not what airlines do in reality. They use far more complicated hedging strategies, and sometimes just engage in jet fuel swaps. (e) (3 points) A forward contract on some real estate that has income expressed as a yield of 10% per year (with continuous compounding) and maintenance costs expressed as a yield of 4% per year (with continuous compounding)

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