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?© BrainMass Inc. brainmass.com June 3, 2020, 9:08 pm ad1c9bdddf
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) = ...
This solution provides calculations related to forward price and the initial value of a forward contract formatted in the attached Word document.