Question: A three-year long forward contract is entered into when the spot price of an investment asset is $30 and the risk free rate for all

A three-year long forward contract is entered into when the spot price of an investment asset is $30 and the risk free rate for all maturities. (With continuous compounding is 10%. the asset provides an income of $2 at the end of the first year and $2 at the end of the second.

a) what is the 3 year forward price?

b) what is the initial value of the forward contract?

c) Two and a half years later, the spot price of the asset is $35 and the risk free rate for all maturities is 8% (with continuous compounding). what are the forward price and the value of the forward contract?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

nine month forward price on a non dividend paying stock is entered into. What is the forward price if the spot price is $21 and the risk free interest rate continuous compounding 4% per year? 6...

The spot price of an investment asset is$25and the risk-free rate is8%,8.5%and9.5%for one-year-,two-year-and three-year-maturity,respectively.The asset provides an income of$4at the end of the first...

several months ago, xyz entered into a long forward contract on an asset with no income. xyz agreed to pay $30 to seller at maturity. today, the contract matures in 7 months. the risk free rate with...

a) Suppose that in November 2021, a company goes long on three April 2022 live-cattle futures contracts. It closes out its position on February 26, 2022. The futures price (per pound of live cattle)...

please do it correctly will upvote 10. The current price of a non-dividend-paying stock is 39.6. Over the next year it is expected to rise to 43.7 or fall to 36.6. An investor buys put options with a...

please do it in 10 minutes will upvote 10. The current price of a non-dividend-paying stock is 39.6. Over the next year it is expected to rise to 43.7 or fall to 36.6. An investor buys put options...

1 Which of the following is NOT true? a. When a CBOE call option on IBM is exercised, IBM does NOT issue more stock b. An American option can be exercised at any time during its life c. A call option...

If the one-year forward price of an asset is too low the trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year....

Looking for assistance in Finance HW..... I ONLY Need the FORMULASin the function ribbon (for the answers that I already have, which are attached below) Please advise if you can assist and provide...

You are estimating the weighted average cost of capital (WACC) for your company based on the following information: Common stock: 20 million shares outstanding, $50 market price per share, common...

Draw the symbol, Boolean function, truth table and ckt diagram using basic gates of 3 input XOR gate

( Bond valuation ) Hamilton , Inc. bonds have a coupon rate of 1 3 1 3 percent. The interest is paid semiannually, and the bonds mature in 1 3 1 3 years. Their par value is $ 1 comma 0 0 0 1 , 0 0 0...

8:37 * N. 80% i ... OBJECTIVES: Create relationships Create a Pivot Table from Related Tables Create a PivotChart Modify the PivotChart The major section in this chapter :ontinuation is: Data...

A report to your boss, the store manager, about the outdated items in the warehouse

A phone call to a supplier to check on an overdue parts shipment

A blog posting to customers and the news media about your companys plans to acquire a competitor