Question 48:

A stock is expected to pay a dividend of $1.25 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 3% per annum with semi-annual compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock.

a) What are the forward price and the initial value of the forward contract?

b) Three months later, the price of the stock is $46 and the risk-free rate of interest is still 3% per annum. What are the forward price and the value of the short position in the forward contract?