Computation of the price of the forward contract

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Reference no: EM1314915

Computation of the price of the forward contract and position

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 percent per year.

What are the forward price and the value of the short position in the forward contract?

Reference no: EM1314915

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