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Question 3 (20 marks) A 9-month short position of a forward contract on a stock is entered into today, when the stock price is $60.
Question 3 (20 marks) A 9-month short position of a forward contract on a stock is entered into today, when the stock price is $60. The stock has expected dividends of $ 1.0 in 2 months, $2.0 in 5 months, and $2.0 in 7 months respectively. The risk-free interest rate is 3.0% per annum with continuous compounding. (a) What is the forward price today? (5 marks) (b) What is the initial value of the forward contract today? (5 marks) (c) 3 months later, the price of the stock decreases to $55 and the risk-free interest rate remains the same. What are the forward price and the value of the forward position then? (10 marks)
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