1. The risk-free interest rate is fixed at 5% per annum with continuous compounding for all...

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1. The risk-free interest rate is fixed at 5% per annum with continuous compounding for all maturities. ABC is a public firm that is expected to pay no dividend. Round to the nearast thousandth (the third digit after decimal point). A 10² (1.1) On Feb 1st, the spot price of ABC is $52. Suppose Bill entered into a short position of 1 million shares of ABC on Feb 1st using a one-year forward contract. Suppose that the forward price is set to satisfy the no-arbitrage condition. What is the value of Bill's position in the forward contract? (1.2) On Sep 1st, spot price of ABC becomes $53. What is the value of Bill's position now? Why is his position more (or less) valuable? (1.3) On Oct 1st, ABC unexpectedly announces that it will issue a one-time dividend of $3 on Dec 1st. Market reacts negatively to the announcement and the spot price of ABC falls immediately from $54 to $53 per share. What is the value of Bill's forward contract right after the announcement? How can Bill eliminate the risk in his profit at maturity of his forward contract position? 1. The risk-free interest rate is fixed at 5% per annum with continuous compounding for all maturities. ABC is a public firm that is expected to pay no dividend. Round to the nearast thousandth (the third digit after decimal point). A 10² (1.1) On Feb 1st, the spot price of ABC is $52. Suppose Bill entered into a short position of 1 million shares of ABC on Feb 1st using a one-year forward contract. Suppose that the forward price is set to satisfy the no-arbitrage condition. What is the value of Bill's position in the forward contract? (1.2) On Sep 1st, spot price of ABC becomes $53. What is the value of Bill's position now? Why is his position more (or less) valuable? (1.3) On Oct 1st, ABC unexpectedly announces that it will issue a one-time dividend of $3 on Dec 1st. Market reacts negatively to the announcement and the spot price of ABC falls immediately from $54 to $53 per share. What is the value of Bill's forward contract right after the announcement? How can Bill eliminate the risk in his profit at maturity of his forward contract position?

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