On January 1st, 2021, an investor enters into a 9-month forward contract on an asset. In February,
Question:
On January 1st, 2021, an investor enters into a 9-month forward contract on an asset. In February, April, June, and September, dividends are paid on the asset at a rate of 3%. In other months, dividends are paid at a rate of 2%. All dividend yields are expressed in semiannual compounding.
The risk-free rate of interest over the period is 8% per annum with continuous compounding and the asset is worth $45.00 at contract initiation.
a. What is the no-arbitrage price of the forward contract?
b. What is the Convenience Yield and what does a higher or lower convenience yield reflect?
c. Coming out of the COVID-19 pandemic and considering the Russia-Ukraine war, would you expect the convenience yield to lead to a normal or inverted market for oil futures prices? Explain
Expert Answer:
a The noarbitrage price of the forward contract is 4500 bThe convenience yield is the additional ret... View the full answer
