Question

Price a 1 year forward, with continuous compounding risk free rate of 5%, spot price of $1 and a dividend of $0.10 after 6 months. The price is _______.

		0.93
		1.75
		0.95
		1.05

Answer 1

PV= FV e^rt
Where,
FV= Future value
PV = Present Value
t = length of time
r= nominal annual interest rate
=0.1 / 2.7183^(0.05*0.5)
=0.097
P(t)= P0 e^rt
Where,
P(t) = value at time
P0= Spot price - Pv of dividend = $1-0.097 =0.903
t = length of time
r= nominal annual interest rate
=0.903 * 2.7183^(0.05*1)
=0.95