Question 1. (This question has three parts: I, II and III)

A stock is anticipated to yield a dividend of $3 per share in 4 months. The current stock price is $150, and the risk-free interest rate is 8% per annum with quarterly compounding for all time periods.

An investor has initiated a long position in a 6-month forward contract on the same stock.

Part I.

What forward price should be set in the above contract to render its value zero at the beginning?

(4 marks)

Part II.

Two months later, the price of the stock is $160 and the riskfree rate of interest remains 8% per annum with quarterly compounding. What is the fair forward-price for the same underlying and maturity date as mentioned earlier?

(3 marks)

Part III.

Continue from Part II, what is the value of the investors position in the forward contract?