Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

An investor has just taken a short position in a one-year forward contract on a dividend paying stock. The stock is expected to pay a

An investor has just taken a short position in a one-year forward contract on a dividend paying stock. The stock is expected to pay a dividend of $4 per share in five months and in eleven months. The stock price is currently selling for $100 and the risk-free rate of interest is 7% per year with continuous compounding for all maturities. a. What are the forward price and the initial value of the forward contract? The forward price is (sample answer: $75.50) and the initial value is (sample answer: $75.50) b. Six months later, the price of the stock is $105 and the risk-free rate stays the same. What are the forward price and the value of the position in the forward contract? Now the forward price is (sample answer: $75.50) and the value of the futures posiiton is (sample answer: +$5.50; or -$5.50)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Pricing And Liquidity Of Complex And Structured Derivatives

Authors: Mathias Schmidt

1st Edition

3319459694, 978-3319459691

More Books

Students also viewed these Finance questions