Question
A stock is expected to pay a dividend of $0.75 per share in 1 month, in 4 months, in 7 months, in 10 months, etc.
A stock is expected to pay a dividend of $0.75 per share in 1 month, in 4 months, in 7 months, in 10 months, etc. The current stock price is $98.50 and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. Today you entered into a short position in ten 9-month forward contracts on the stock.
(a) What is the forward price, and what is the value of your position (ten short forward contracts) today?
(b) Assume that six months later the price of the stock is $100.10 and the risk-free rate is the same as before. What will the forward price be, and what will the value of your position (ten short forward contracts) be?
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