2520 HW3 No.2

(20pt) Consider a forward contract whose underlying assets incur continuous income with rate q. We assume that the interest rate r and income rate q are continuously compounded. Derive the following formula: F0=S0e(rq)T where F0 is the forward price, S0 is the initial price of the underlying asset, and T is the maturity of the forward contract. Hint: note that if an investor acquires eqT shares of the asset at time 0 and do the continuous immediate reinvestment of income, he/she owns exactly one share of the asset at time T