Question

3. A stock is expected to pay a dividend of $1.25 per share in 3 months and also in 6 months. The stock price is $46 and the risk-free rate of interest is 6.5 % per annum with continuous compounding on all maturities. An investor has taken a short position in a six-month forward contract on the stock. What is the forward price?

Answer 1

Current Stock Price = $ 46, Risk Free Rate = 6.5 %, Dividends: $ 1.25 at the end of 3 Months and $ 1.25 at the end of 6 Months

6-Month Forward Rate = 46 x e^[0.065 x (6/12)] - 1.25 / e^[0.065 x (3/12)] - 1.25 / e^[0.065 x (6/12)] = $ 45.07968 ~ $ 45.08