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problem: A stock is expected to pay a dividend of 1 dollar per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8 percent per annum with continuous compounding for all maturities. An investor has just taken a short position in a six month forward contract on the stock.

[A] find out the forward price and the initial price of the forward contract?

[B] Three months later, the price of the stock is 48 dollar and the risk-free rate of interest is still 8% per year.

[C] Determine the forward price and the value of the short position in the forward contract?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918913

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