Question

Assume that the price of a stock is $50 at the beginning of the year, the risk-free rate is 6% (assumed constant, continuously compounding) and a $2 dividend is to be paid after a half

year.

(a) Determine the current forward price F (0, 1) maturing in one year.

(b) For a short position in forward maturing in one year, find the expected value of the

forward after 9 months if at that time the stock price turns out to be $48 or $52 equally likely. Recall that the value of a long forward position is given by (F (t, T ) − F(0,T))B(t,T), where F(t,T) and B(t,T) are respectively the forward price and the price of a zero coupon bond at time t, both maturing at time T.

Answer 1