Explain what type of transaction the investor could execute

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Point 1: An investor holds title to an asset worth 125.72. To raise money for an unrelated purpose, the investor plans to sell the asset in nine months. The investor is concerned about uncertainty in the price of the asset at that time. The investor learns about the advantages of using forward contracts to manage this risk and enters into such a contract to sell the asset in nine months. The risk-free interest rate is 5.625 percent.

Question A. Determine the appropriate price the investor could receive in nine months by means of the forward contract.

Question B. Suppose the counterparty to the forward contract is willing to engage in such a contract at a forward price ofe 140. Explain what type of transaction the investor could execute to take advantage of the situation. Calculate the rate of return (annualized), and explain why the transaction is attractive.

Reference no: EM132483405

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