Question

4. The current spot price of the stock of Fly By Night Industries is 150. Fly By Night Ind. pays a quarterly dividend of 3. The next dividend will be paid in two months. The risk free interest rate compounded continuously is 5%. Calculate the forward price for a one year forward contract. 5. The one year forward price for the stock of The Moving Pictures Moving Company (Ticker Symbol YYZ) is 296.53. YYZ pays a quarterly dividend of 10 with the next dividend payable in 2 months. The risk free interest rate is 5% compounded continuously. Calculate the current spot price of YYZ stock. An Index has a current price of 2112. The risk free interest rate is 3.5% compounded continuously. The Index pays at a dividend rate of 6%. Determine the forward price of the index to be delivered in 20 months.

Answer 1

Part 4:

Spot price of the asset= 150

Dividend per quarter = 3

Risk free rate of interest= 5%

Time to maturity = 1 year

the dividend pa = 3*4 = 12

The dividend yield rate is = 12/150*100= 8% pa

The forward price is calculated using the below formulae

Forward price = spot price*e power (0.05-0.08)

= 150*e power -0.03

= 150*0.97045

= 145.5675

Part 5: Rf = 5%

dividend = 10*4= 40

forward price= 296.53

Asume spot price = x

Forward price = x * e power (0.05- 0.4)

296.53= x *e power -0.35

296.53 =   x*0.70469

x = 296.53/0.70469

x= 420 (Approx)

Part 6:   spot price of index =2112

risk free =3.5%

Dividend rate =6%

Forward price= 2112*e power 0.035-0.06

2112* e power -0.565

= 2112*0.56836

= 1200 (Approx)