Suppose Joe has just entered into a long position of 6-month forward contract on a dividendpaying stock
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Question:
Suppose Joe has just entered into a long position of 6-month forward contract on a dividendpaying stock when the stock price is $55. The stock is expected to pay dividends of $0.5 per share in 1 month and 4 months respectively. The interest rate is 3% per annum with continuous compounding.
(a) Explain the difference between forward price and the value of a forward contract. (2 marks)
(b) Determine the forward price of the contract today. (8 marks)
(c) After three months, the stock price is $52. What is the value of the forward contract now? Assume that the interest rate remains unchanged. (10 marks)
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