An asset manager anticipates the receipt of funds in six months, which he will use to purchase
Question:
An asset manager anticipates the receipt of funds in six months, which he will use to purchase a particular stock. The stock he has in mind is currently selling for $39 and pay $1.5 dividend in one month and another $1.2 dividend in 5 months. The risk-free rate is 3.2% per annum with continuous compounding for all maturities. The manager decides to commit to a future purchase of the stock by going long a forward contract on the stock.
a. At what price would the manager commit to purchase the stock in six months through a forward contract?
b. Suppose the manager enters into the contract at the price you found in part a. Now, two months later, the stock price is $42. Determine the value of the forward contract at this point.
c. It is now the expiration day, and the stock price is $ 32. Determine the value of the forward contract at this time.
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter