Consider a 2-year forward contract on a security that is expected to pay a $1 dividend in
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Question:
Consider a 2-year forward contract on a security that is expected to pay a $1 dividend in 1 year and $6 dividend in 2 years (just before the contract matures), and $10 dividend in 5 years. The term structure is flat 5% (EAR). The spot price of the security is $30.
What is the fair forward price?
Suppose that the contract stipulates an unfair forward price of $25. How much would you need to pay today to enter into this contract as the long side?
Suppose that the contract stipulates an unfair forward price of $28. How much would you need to pay today to enter into this contract as the short side?
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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