Question

The spot price of an investment asset is $50 and the risk-free rate for all maturities...

  1. The spot price of an investment asset is $50 and the risk-free rate for all maturities is 8% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price?

    A) $56.32                         B) $59.03                   C) $53.55                   D) $57.31

Homework Answers

Answer #1

The three year forward price is computed as shown below:

= Spot price x e risk free rate x 3 - $ 2 x e risk free rate x 1 - 2 x e risk free rate x 2

= $ 50 x 2.71828 0.08 x 3 - $ 2 x 2.71828 0.08 x 1 - $ 2 x 2.71828 0.08 x 2

= $ 50 x 2.71828 0.24 - $ 2 x 2.71828 0.08 - $ 2 x 2.71828 0.16

= $ 50 x 1.271248945 - $ 2 x 1.083287009 - $ 2 x 1.173510745

= $ 59.03 Approximately

So, the correct answer is option B.

Feel free to ask in case of any query relating to this question

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The spot price of an investment asset is $50 and the risk-free rate for all maturities...
The spot price of an investment asset is $50 and the risk-free rate for all maturities is 8% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price?     A) $56.32                          B) $59.03                    C) $53.55                    D) $57.31
The spot price of an investment asset is $30 and the risk-free rate for all maturities...
The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $3 at the end of the first year and at the end of the second year. What is the three-year forward price? (Hint: First find the PV of year 1 and year 2 incomes and then subtract it from the spot price.) 19.67 $33.46 $45.15 $40.50
Price a 1 year forward, with continuous compounding risk free rate of 5%, spot price of...
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
The spot exchange rate is $1.16 per euro, and the six-month risk-free interest rates are 2%...
The spot exchange rate is $1.16 per euro, and the six-month risk-free interest rates are 2% in the U.S. and 1% in the eurozone, both with continuous compounding. What is the six-month forward rate?
#1. The spot price of a certain asset is S0 = $50400 And the price for...
#1. The spot price of a certain asset is S0 = $50400 And the price for a six months maturity future over such underlying asset is F= $53550 a) Compute the risk free rate (continuous compounding). b) Combine the spot and the future markets so as to replicate debt. Your wealth is $ 50,400,000, show two strategies that: b1) Invest purchasing both, the underlying asset and bonds. b2) Invest purchasing only the underlying asset and borrowing money.
The S&R index spot price is 1100, the continuously compounded risk-free rate is 5%, and the...
The S&R index spot price is 1100, the continuously compounded risk-free rate is 5%, and the continuous dividend yield on the index is 2%. (a) Suppose you observe a 6-month forward price of 1120. What arbitrage would you undertake? (b) Suppose you observe a 6-month forward price of 1110. What arbitrage would you undertake? *YOU MUST ANSWER WITH DETAILED WORKING!!
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
A stock is expected to pay a dividend of $2 per share in three months. The...
A stock is expected to pay a dividend of $2 per share in three months. The share price is $75, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a long position in a six-month forward contract on a share of stock. a) What are the forward price and the initial value of the forward contract? b) Three months later, immediately after the payment of the dividend, the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT