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A hypothetical stock is expected to pay a dividend of $12 per share in two months, in six months and in ten months. The stock price is $600, and the risk-free rate of interest is 0.55% per annum with continuous compounding for all maturities. An investor has just taken a short position in a twelve-month forward contract on the stock. a) What are the forward price and the initial value of the forward contract? b) Three months later, the price of the stock is $580 and the risk-free rate of interest is still 0.55% per annum. What are the forward price and the value of the short position in the forward contract?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91768709

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