Think about how the value of a forward contract on a dividend paying stock changes over time. Suppose that the continuous dividend yield of the stock of JKL is q = 3% per annum. On January 30, 2020, the stock is traded at $100. The continuously-compounded risk-free rate is rc = 6% per annum. (1) You want to enter a long position of forward contract on January 30 with expiration date January 30, 2021. 

What's the forward price if you want to enter the forward contract without cost? (2) On July 30, 2020, the price of one JKL share moves $150.

What is the forward price of a forward contract with delivery date December 30 (this is a different contract)? 

On July 30, 2020, how much would you like to pay for the forward contract that were initiated on January 30, 2020 in (1)? 

What is the value of a short position in the forward contract from (1) if JKL stock price is $80 on July 30, 2020?

Create a replication portfolio to justify your result.

Answer rating: 100% (QA)

SOLUTION To enter the forward contract without cost we need to set the forward price equal to the current price of the stock plus the present value of the expected dividends Since the stock pays a con... View the full answer