Question
A one-year long forward contract on a dividend-paying stock is entered into when the stock price is AUD 75, the dividend yield is expected to
A one-year long forward contract on a dividend-paying stock is entered into when the stock price is AUD 75, the dividend yield is expected to be 6% the risk-free rate of interest is 8% pa with continuous compounding. (1) What are the forward price and the initial value of the contract? (2) Six months later, the price of the stock is AUD 67 and the risk-free interest rate and dividend yield are still 8% and 6% respectively. What are the forward price and value of the forward contract. (6 marks)
Discuss one risk associated with forward contracts that is not applicable to futures contracts. Given this risk, why would you choose to enter into a forward contract rather than a futures contract? (4 marks)
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