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You are given the following information about apple stock:

One share costs 159 (as of 8/23/2017).

The dividend rate is assumed to be 2% (compounded continuously).

The risk free rate is assumed to be 7% (compounded continuously).

You enter into a cash-and carry for shares of Apple, and you do the following:

You enter into a forward contract where you agree to sell 10 shares of apple for $150/share in two years. You receive $223.62 in the sale.

You decide to buy 10 shares of Apple in two years through a futures exchange (this is not typical). The futures price is the forward price. The margin account requires that you deposit 25% of the purchase price, and the account pays the risk free rate. Settlement on this exchange occurs every six months. The futures price varies over that time: the prices are 170, 180, 173, and 179 at months 6, 12, 18, and 24 respectively.

Suppose that you entered into a cash-and-carry like arrangement where you agreed to sell 10 shares of Apple through a forward contract, where the forward price is the agreed upon price. To hedge the sale, you use the futures arrangement from above. What is your profit?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92641651

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