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Consider a perpetuity with annual payments starting in year 5. The first payment in year 5 is $15; the payment then grows at a constant
Consider a perpetuity with annual payments starting in year 5. The first payment in year 5 is $15; the payment then grows at a constant rate of 1.5% per year forever. Consider a forward contract that delivers this perpetuity in year 3. What is the forward price at date 0 if the term structure is at at r=1.8%? What is the value of a long position in this forward contract one year later, if in year 1 the term structure shifts to 1.6% and remains flat?
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