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An investor has just taken a short position in a one-year forward contract on a dividend...

An investor has just taken a short position in a one-year forward contract on a dividend paying stock. The stock is expected to pay a dividend of $2 per share in five months and in eleven months. The stock price is currently selling for $100 and the risk-free rate of interest is 8.50% per year with continuous compounding for all maturities.

a. What are the forward price and the initial value of the forward contract? The forward price is (sample answer: $75.50) and the initial value is (sample answer: $75.50)

b. Six months later, the price of the stock is $105 and the risk-free rate stays the same. What are the forward price and the value of the position in the forward contract? Now the forward price is (sample answer: $75.50) and the initial value is (sample answer: +$5.50; or -$5.50)

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