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A 1-year forward contract on an equity index with a continuous dividend yield of 3.5% per annum is entered into when the index is 3,250.
A 1-year forward contract on an equity index with a continuous dividend yield of 3.5% per annum is entered into when the index is 3,250. The continuously compounded risk free rate of interest is 7% per annum. (a) Calculate the theoretical 1-year forward price for the contract. (b) Three months later, the index is at 3,900, the continuous dividend yield on the index is 3.1% per annum and the continuously compounded risk free interest rate is 6.5% per annum. Calculate the theoretical 9-month forward price at that time and the value of the forward contract in (a). (c) Explain the potential problems that can occur when using a published dividend yield to price forward contracts on an equity index
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