What would be the fair forward price for this contract

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Reference no: EM13849160

S&P 500 index has a dividend yield of 3% today. The current index is trading at $1800 and the risk-free interest rate is 5% per annum with continuous compounding. An investor would like to enter into a short one-year forward contract on the index.

A. What would be the fair forward price for this contract?

B. Suppose that six months later, S&P 500 index trades at $2000, the risk-free interest rate is 6% per annum and the annualized dividend yield increased to 4%. What would be the current value of the investor’s short position?

Reference no: EM13849160

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