Question
Today (time = 0), a trader enters a short forward contract on 100 shares of Shamrock Motors (SHAM) stock. The forward contract has a maturity
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Today (time = 0), a trader enters a short forward contract on 100 shares of Shamrock Motors (SHAM) stock. The forward contract has a maturity of = 1 year. The spot price of SHAM today is $125 per share. The risk-free rate is constant at 3% per year. Assume that the expected (average) rate of return on SHAM is 20% per year and that SHAM does not pay a dividend. All forward prices are determined under no-arbitrage, traders can borrow and lend limitlessly at the risk-free rate. Six months from now, we would expect that, on average, the value of the traders forward position will be:
a. +$1,142.74
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b. -$1,125.72
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c. +$2,386.85
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d. -$2,351.32
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