Question: Consider a 10-month forward contract on a stock when the stock price is $50.00. We assume that the risk-free-rate of interest (c.c) is 8% per

Consider a 10-month forward contract on a stock when the stock price is $50.00. We assume that the risk-free-rate of interest (c.c) is 8% per annum for all maturities. We also assume that dividends of $0.75 per share are expected after 3 months, 6 months, and 9 months. The present value of the dividends I is

I = $0.75e-0.08*3/12+$0.75e-0.08*6/12+$0.75e-0.08*9/12 = $2.16206

OR simplify the equation

I = $0.75[e-0.08*3/12+e-0.08*6/12+e-0.08*9/12)] = $2.16206

The variable T is 10 months, so the forward price, F0 is given by:

F0,10/12 = ($50 - $2.16206)e0.08*10/12 = $51.1358

QUESTION:

1. What would you do if the forward was bid: $50.50 ask: $50.75?

2. What would you do if the forward was bid: $52.00 ask: $52.05?

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