A stock is expected to pay a dividend of $1 per share in 2 months and in 5 months. The
Chapter 5, Problem 5.30(choose chapter or problem)
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 8% per annum. What are the forward price and the value of the short position in the forward contract?
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