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Question 2 a) The current price of a stock is $55. The continuous compounded risk-free rate is 8% per annum. The stock is expected to
Question 2 a) The current price of a stock is $55. The continuous compounded risk-free rate is 8% per annum. The stock is expected to pay a dividend of $1 in one month and four months. An investor enters into a short position in a six-month forward contract on this stock today. i. Calculate the forward price today. (5 marks) i. Discuss the difference between forward pricing for investment assets and forward pricing for consumption assets. (5 marks) (Total Marks: 10) b) The current stock price is $75.00 and a six-month European call option with a strike price of $78.00 costs $2.5. An investor has $7,500 to invest. i. What are two alternative trading strategies for this investor? (2 marks) ii. In which situation can both strategies make the same profits? (3 marks) ii. Distinguish different situations and compare the profit or loss of each strategy in each situation. (10 marks) (Total Marks: 15)
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