Question: Consider a 2-year forward contract on a security that is expected to pay a $1 dividend in 1 year and $6 dividend in 2 years

Consider a 2-year forward contract on a security that is expected to pay a $1 dividend in 1 year and $6 dividend in 2 years (just before the contract matures), and $10 dividend in 5 years. The term structure is flat 5% (EAR). The spot price of the security is $30.

(a) [3 points] What is the fair forward price?

(b) [3 points] Suppose that the contract stipulates an unfair forward price of $25. How much would you need to pay today to enter into this contract as the long side?

(c) [1 points] Suppose that the contract stipulates an unfair forward price of $28. How much would you need to pay today to enter into this contract as the short side?

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