Question
There is a 120-day futures contact on a stock. The current stock price is $50.00 and the stock is expected to pay a dividend of
There is a 120-day futures contact on a stock. The current stock price is $50.00 and the stock is expected to pay a dividend of $0.20 in 20 days, and $0.20 in 110 days. The annual risk-free rate is 5%. Assume there are 365 days in a year and continuous compounding.
(a) Calculate the no-arbitrage futures price of this contract.
(b) Assume the futures price in the contract is equal to the no-arbitrage price you computed in (a). After 60 days, the stock price is $45.50. Calculate the value of the contract to the long and short positions, assuming the risk-free rate is still 5%. Assume there are 365 days in a year and continuous compounding
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started