You just started an internship at a large bank. Your boss requires you to quote bid and ask prices for a forward contract on IBM stock. She provides you with the following information:

Maturities required: 1, 2, 3, 4 and 5 years

Rates available in the market (continuous compounding):

Size of the contract: 2000 shares

She also collects the following information about the current stock price per share of IBM stock:

Bid price: $120

Ask price: $122

Future dividend payments: 2 dollars every six months (the next payment is exactly in six months).

You argue with your boss that you cannot price this forward since the formula you have does not consider bid/ask prices. Your boss tells you that you have until the end of the day to provide her with a solution; otherwise, your internship ends.

a) How can you include bid/ask prices and borrowing/lending costs in the cost-of-carry method developed in class?

b) Provide the required quoted prices per share for each maturity

Maturity (less or equal to) Borrowing rate Lending rate 1 2 3 4 5 2.2% 2.5% 2.7% 2.9% 3.0% 2.0% 2.3% 2.5% 2.8% 2.9% Maturity (less or equal to) Borrowing rate Lending rate 1 2 3 4 5 2.2% 2.5% 2.7% 2.9% 3.0% 2.0% 2.3% 2.5% 2.8% 2.9%