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Question 12 (15 points) A portfolio manager, Mary, owns Macrogrow, Inc., which is currently trading at $35 per share. She plans to sell the stock
Question 12 (15 points) A portfolio manager, Mary, owns Macrogrow, Inc., which is currently trading at $35 per share. She plans to sell the stock in 120 days, but is concerned about a possible price decline. Mary decides to take a short position in a 120-day forward contract on the stock. The stock will pay a $0.50 per share dividend in 35 days, $0.50 again in 125 days, and another $0.5 in 215 days. The risk free rate is 4%. Assume there are 365 days in a year and continuous compounding. (a) (5 points) Calculate the no-arbitrage forward price of this contract. (b) (10 points) Suppose the forward price in the contract is equal to the no-arbitrage price you computed in (a). After 45 days, the stock price is $27.50. Calculate the value of the contract for Mary, assuming the risk-free rate is still 4%
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