Question
Jane is a portfolio manager for ABC Capital. She forecasts that the common stock of XYZ Corp, which ABC intends to buy, and which is
Jane is a portfolio manager for ABC Capital. She forecasts that the common stock of XYZ Corp, which ABC intends to buy, and which is now priced at $60, will most probably increase in the near future and plans to buy it in 120 days. Two dividend payments of $1.00/share each are expected on XYZ stock, one in 20 days and one in 110 days. The risk free rate is 4% on a continuous compounding basis.
Use the above information to answer question
1. Jane could hedge against a possible price increase in the stock price in 120 days by:
a) Selling a forward contract on the stock with 120 days to the delivery date
b) Buying a forward contract on the stock with 120 days to the delivery date
c) Buying a forward contract on the stock with 150 days to the delivery date
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