Consider an 8-month forward on Costco stock, priced at $70 per share, with a 4% annual continuously compounded risk-free rate. Quarterly dividends of $0.70 are expected in one month and four months. A. What is the hypothetical forward price of the stock? B. What is the arbitrage strategy if the forward price is $72 per share?
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Akash M.
A stock is expected to pay a dividend of $\$ 1$ per share in 2 months and again in 5 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 6 -month forward contract on the stock. (a) What are the forward price and the initial value of the forward contract? (b) Three months later, the price of the stock is $\$ 48$ and the risk-free rate of interest is still $8 \%$ per annum. What are the forward price and the value of the short position in the forward contract?
A stock is expected to pay a dividend of $0.75 per share in 1 month, in 4 months, in 7 months, in 10 months, etc. The current stock price is $98.50 and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. Today you entered into a short position in ten 9-month forward contracts on the stock. (a) What is the forward price, and what is the value of your position (ten short forward contracts) today? (b) Assume that six months later the price of the stock is $100.10 and the risk-free rate is the same as before. What will the forward price be, and what will the value of your position (ten short forward contracts) be?
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