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The current price of Adelphia Communications stock is $64 per share. An investor who owns 5,000 shares plans to liquidate the position for a down
- The current price of Adelphia Communications stock is $64 per share. An investor who owns 5,000 shares plans to liquidate the position for a down payment on a home in 3 months and is concerned about a decline in the price in the interim. The investor contacts a dealer and receives a quote on a forward contract on Adelphia stock. No dividend payments are expected over the life of the forward contract.
- Which side of the forward contract is appropriate for the investor, long or short? (1 point)
- If the risk-free rate is 4.75% compounded annually, what is the no-arbitrage forward price per share for the 3-month forward contract? (1 point)
Assume the investor entered the appropriate position in the forward contract at the no-arbitrage price computed in part b. One month has now elapsed, the risk-free rate is now 4.50%, and the price of Alephia stock is now $59. What is the value of the investors 5,000 share forward position?
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