A stock is expected to pay a dividend of 1 per share in two, Ask an Expert

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A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% 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) What are the forward price and the initial value of the forward contract?

b) Three months later, the price of the stock is $48 and the risk-free rate of interest is still 8% 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.:- M92306124

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