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    What are the forward price and the initial value of the forward contract?

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    A stock is expected to pay a dividend of $1 per share in 2 months and in 5 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 6-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 85 per annum. What are the forward price and the value of the short position in the forward contract?

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    https://brainmass.com/business/business-law/forward-price-initial-value-forward-contract-167680

    Solution Preview

    Please see the attached file.

    Formulas: F = (S - PV (D))erT;

    f = (F - K) e-rT

    a) The present value PV (D) of the income from the security is given by:

    PV (D) = ...

    Solution Summary

    This solution provides calculations related to forward price and the initial value of a forward contract formatted in the attached Word document.

    $2.19

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