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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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#### 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