Fair forward price specified in above forward contract

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Reference no: EM133495659

A stock is expected to pay a dividend of $2 per share in 2 months and in 5 months. The stock price is $100, and the risk-free rate of interest is 10% per annum annually compounding for all maturities.

An investor has just taken a short position in a 6-months forward contract on the stock.

Part I.

What is a fair forward price specified in the above forward contract to let its value be zero at initiation?

Part II.

Three months later, the price of the stock is $96 and the risk-free rate of interest is 9% per annum annually compounding. What is the fair forward price for the same underlying and same maturity as above?

Part III.

Continue with Part II, for the investor, what is the value of her position in the forward contract?

Reference no: EM133495659

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