A stock is expected to pay dividends of $2 per share every three months. The share price is $75 and the risk-free rate is 8% per annum with continuous compounding for all maturities. An investor recently took a long position on a six-month futures contract on a stock.

Required:

a) What is the forward price and the initial value of the forward contract?

b) Three months later, immediately after the dividend is paid, the price of the stock is $90 and the risk-free rate is 8% per annum with continuous compounding. What is the forward price and the value of the long position in the forward contract bought three months ago?

Answer rating: 100% (QA)

a The dividend payment over the sixmonth period is 2 per share per quarter so the total dividend pay... View the full answer