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What is the forward price and initial value

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A stock is expected to pay a dividend of $1.00 per share in two months and in five months. The stock price is $60, and the risk-free rate is 2% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock.

a. What is the forward price and initial value of the forward contract?

b. Three month later, the price of the stock is $53 and the risk-free rate is still 2% per annum. What are the forward price and the value of the short position in the forward contract?

c. Show how the investor can realize the profit in part (b) by trading the underlying stock and the risk-free bond.

Reference no: EM133058537

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