Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

CFIN

Authors: Scott Besley, Eugene Brigham

5th edition

1305661656, 9781305888036 , 978-1305666870

More Books

Students also viewed these Finance questions

Question

Which statement is true about Cisco IOS ping indicators?

Answered: 1 week ago