Question

A short forward contract on an investment asset that yields 7.7% and was negotiated some time...

A short forward contract on an investment asset that yields 7.7% and was negotiated some time ago will expire in 1 months and has a delivery price of $60. The current spot price of the commodity is $63. The risk-free interest rate (with continuous compounding) is 1.8%. What is the value of the short forward contract?

An investor shorts 178 shares when the share price is $78 and closes out the position 10 months later when the share price is $50. The shares pay a dividend of $7 per share during the 10 months. How much does the investor gain or lose?  

Alrajhi Bank plans to pay a dividend of 3 per share both 1 and 7 from today. Alrajhi share price today is 60 SAR and the continuously compounded interest rate is 0.06. What is the price of a 9-month forward contract?

A short forward contract on a commodity that was negotiated some time ago will expire in 3 months and has a delivery price of $40. The current spot price of the commodity is $66. The risk-free interest rate (with continuous compounding) is 2.3%. What is the value of the short forward contract?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The theoretical Forward price today = S*e^((r-i)*t)

where S is the spot price , r is the risk free rate i is the yield and t is the time till maturity

The theoretical Forward price today = 63*e^((0.018-0.077)*1/12) = 62.69

Value of Forward on delivery = 60-62.69 = -2.69

Value today = -2.69 * e^(-0.018*1/12) = - $2.6859

Investor got the money by selling the shares but missed out on the dividend during the 10 months

Investor's gain per share = 78-50- 7 = $21

Total gain = $21*178 = $3738

Price of a future contract F = (S-I)*e^(rt)

where S is the spot price, I is the present value of dividends during the maturity period, r is the risk free rate and t is the time till maturity in years

I= 3*e^(-0.06*1/12) + 3*e^(-0.06*7/12) = 5.88

So F= (60-5.88) * e^(0.06*9/12) =56.61 SAR

The theoretical Forward price today = S*e^((r-i)*t)

where S is the spot price , r is the risk free rate i is the yield and t is the time till maturity

As yield =0

The theoretical Forward price today = 66*e^((0.023*3/12) = 66.38

Value of Forward on delivery = 40-66.38 = -26.38

Value today = -26.38 * e^(-0.023*3/12) = - $26.23

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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...
On May 20, 2020 , an investor entered into a three-month long forward contract on an...
On May 20, 2020 , an investor entered into a three-month long forward contract on an investment commodity X. The price of the commodity on May 20, 2020 is $40. This commodity provides income at a rate of 1.3% with continuous compounding and requires storage costs at a rate of 0.8% with continuous compounding. The risk-free rate of interest is 6% per year with semiannual compounding. What is the equivalent risk-free rate with continuous compounding? What is the cost of...
A stock is expected to pay a dividend of $5 per share in 2 months ....
A stock is expected to pay a dividend of $5 per share in 2 months . At initiation, the stock price is $100, and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. An investor takes a short position in a 9-month forward contract on the stock. It is calculated for you that the present value of the dividend, i.e. I is 4.95. Six months later, the price of the stock is $90 and...
Problem 3: A one-year-long forward contract on a non-dividend-paying stock is entered into when the stock...
Problem 3: A one-year-long forward contract on a non-dividend-paying stock is entered into when the stock price is $50 and the risk-free interest rate is 5% per annum (continuous compounding). (a) What are the forward price and the initial value of the forward contract? (b) Six months after the signing of the forward contract, the price of the stock is $55 and the risk-free interest rate is still 5%. What is the new market forward price for the same contract...
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price...
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $40 and the risk-free rate of interest is 10% per annum with continuous compounding. a) What are the forward price and the initial value of the forward contract? b) Six months later, the price of the stock is $45 and the risk-free interest rate is still 10%. What A one-year long forward contract on a non-dividend-paying stock is entered into when the stock...
A stock is expected to pay a dividend of $1 per share in two months and...
A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. What are the forward price and the initial value of the forward contract? Three months later, the price of the stock is $48 and...
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...
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. Three months later, immediately after the payment of the dividend, the price of the stock is $90 and the risk-free rate of interest is still 8%...
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price...
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $41 and the risk-free rate of interest is 10% per annum with continuous compounding. a. What are the forward price and the initial value of the forward contract? b. Six months later, the price of the stock is $45 and the risk-free interest rate is still 10%. What are the forward price and the value of the forward contract?
A stock is expected to pay a dividend of $2.50 per share in two (2) months,...
A stock is expected to pay a dividend of $2.50 per share in two (2) months, in six(6) months and in eight(8) month. The stock price is $66, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a nine-month forward contract on the stock. What are the forward price and the initial value of the forward contract? Five (5) months later, the price of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT