Question
A stock is expected to pay a dividend of $2 per share in three months and in six months. The stock price is $60, and
A stock is expected to pay a dividend of $2 per share in three months and in six months. The stock price is $60, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in an eight-month forward contract on the stock.
a. What are the forward price and the initial value of the forward contract?
b. Five months later, the price of the stock is $56 and the risk-free rate of interest is still 8% per annum. What are the forward price and the value of the long position in the forward contract?
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