Question
Todays value of the S&P 500 stock index is at 4,200. The stocks underlying the index provide an estimated dividend yield of 1.4% p.a. (continuously
Todays value of the S&P 500 stock index is at 4,200. The stocks underlying the index provide an estimated dividend yield of 1.4% p.a. (continuously compounded). The risk-free rate is at 1.6% p.a. (continuously compounded). Consider a 5-month forward contract on the S&P 500 stock index. (a) Compute todays arbitrage-free forward price of the 5-month forward contract. Suppose you are entering today into a short position in the 5-month forward contract on the S&P 500 with the forward price computed in (a). (b) What is the value of this short position in the forward contract today? (c) Assume in two months the S&P 500 index will be at 4,100. What will be the value of your short position in the forward contract then?
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