Question
There is a long forward contract on a single, non-dividend paying, stock with price S t at time t. The payoff at time T is
There is a long forward contract on a single, non-dividend paying, stock with price St at time t. The payoff at time T is ST - F0,T where F0,T is the current forward price (t = 0).Now consider a one-step binomial tree where there is one time step to maturity, the current stock price S0 can increase to ST = uS0 or down to ST = dS0 at time T.The continuously compounded rate over the period is r.
1) what current positions (t = 0) in the stock and risk-free investment will replicate the payoff of the long forward contract for any F0,T ? What is the replicating portfolio?
2) what is the current value of the forward contract?
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