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A short forward contract on a non-dividend paying stock is equivalent to short selling theoor stock at time 0, for S0 and buying a zero coupon bond that pays face amountF = S e T at time T. Then at time T' the short position is closed out.
a) If the price of the stock at time t is S1, where 0 < 1 < T, what is the value of theshort forward contract at this time?
b) Show that the value of the short forward contract satisfies the Black-Scholes-MertonPDE.
c) The riskless portfolio consists longing delta units of the underlying stock and shorting1 unit of the derivative. In this example the derivative is a short forward contract. Derive an expression for the riskless portfolio.
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