Question
Jane is a portfolio manager for ABC Capital. She forecasts that the common stock of XYZ Corp, which ABC holds, and which is now priced
Jane is a portfolio manager for ABC Capital. She forecasts that the common stock of XYZ Corp, which ABC holds, and which is now priced at $60, will most probably fall in the near future and plans to sell it in 150 days. Two dividend payments of $1.50/share each are expected on XYZ stock, one in 30 days and one in 120 days. The risk free rate is 4% on a continuous compounding basis.
Use the above information to answer questions.
1. Suppose that the forward price of a forward contract on XYZ stock with 150 days to the delivery date is $60. On the delivery date, if the stock price is 65.00, the value of a long forward position is:
a) -$5.0000
b) +$5.0000
c) - $2.0000
2. Suppose that Jane initiated a short position in a forward contract on XYZ common stock with a delivery date in 150 days and a forward price of $60. When 90 days have passed, the stock price is 58. The risk-free interest rate is still 4%. The value of the contract is closest to:
a) -$3.1019
b) +$3.1019
c) -$1.6144
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