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Suppose today is January 1, 2020. A stock is expected to pay a dividend of $10 per share in two years (i.e., on January 1,

Suppose today is January 1, 2020. A stock is expected to pay a dividend of $10 per share in two years (i.e., on January 1, 2022). The current stock price is $80, and the yield curve is flat with the risk-free rate being 5% per annum, compounded annually. An investor has just taken a long position in a 3-year forward contract on the stock (i.e., expiration date is January 1, 2023). a. What are the forward price and the initial value (or cost) of the forward contract?

On January 1, 2021, the stock price increases to $90. The yield curve is still flat, but the risk-free rate of interest decreases to 4% per annum, compounded annually. b) What is the forward price on the stock with the same expiration date of January 1, 2023? c) What is the value of the original long position in the forward contract established in 2020 at the point in time of 2021?

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