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Please use EXCEL to do it, Thanks!Consider XYZ stock currently worth $95. On Jan 15th, 2019, you plan to sell it 9 months later on Oct 15h, 2019 to raise money, but are concerned that the price may have fallen significantly by then. To hedge this risk, you enter into a forward contract to the stock which will mature on Oct 151h, 2019. Assume that the risk free interest rate will remain at 3.0% pa. in 2019. Use continuous compounding method and YEARFRAC function with ACT/ACT basis Show your answers along with the formula and steps you used for each question A) Ans: Question 1: Assume that XYZ stock will pay dividends continuously at a rate of 1 .5% per year Ans: A) Calculate the theoretical price of the forward today? (1 points) B) Suppose you took the short position at the forward price computed in (A) above. On May 15th, 2015, the spot price of the asset is $95. What is the market value of your short position in the forward contract at this point? (1 points) C) Ans: C) What is the value of the forward contract at expiration assuming the contract is entered into at the price computed in (A) above. The spot price of the asset is $92 at expiration. (2 points). Do not forget to include FV of dividends.

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Answer #1

Please refer to below spreadsheets for calculations and answers.

A.E46 92.60 S9.00Theoretical Price of Forward contract is Future value of Spot Price of assets 1/15/2019minus Future value of any dividends during, on expiry date at risk free 10/15/2019interest rate Stock Spot Price(S) Current date expiry date Risk free Interest (r Dividends (each 1st Dividend date 2nd Dividend date 3rd Dividend date Time(t1l), 1st dividend - expiry date Time(t2), 2nd Dividend - expiry date Time(t3), 3rd dividend - expiry datee Time(t), Current date - Expir Future value of 1st dividend on expir Future value of 2nd dividend on expi Future value of 3rd dividend on expir Theoretical Price of Forward 4 $1.50 2/15/2019where 4/15/2019 9/15/2019 0.6630137 10 F Forward Price S = Assets Spot Price D Dividends r risk free interest t time n number of dividends 12 13 0.50 16 I 17 18 19 0.082192 0.74794521 $ 1.5301 $ 1.5227 $ 1.5037 $ 92.60

Formula reference-


E46 -С 19 Stock Spot Price(S Current date expiry date Risk free Interest (r Dividends (each 1st Dividend date 2nd Dividend date 3rd Dividend date Time(t1l), 1st dividend - expiry date Time(t2), 2nd Dividend - expiry date Time(t3), 3rd dividend - expiry datee Time(t), Current date - Expir Future value of 1st dividend on expir Future value of 2nd dividend on expi Future value of 3rd dividend on expir Theoretical Price of Forward 4 95 43480 43753 0.03 1.5 43511 43570 43723 12 YEARFRAC(C9,C6,1 YEARFRAC(C10,С6,1 YEARFRAC(C11,C6,1 YEARFRAC(C5,C6,I 16 17 18 19 -C8 EXP(C7 C13 -C8 EXP(C7 C14 C4 PC7 C15)-SUM(C16:C18)U28 21 22 B) 23 (3.56) Spot Price of on May 15th, 2019 Spot date expiry date Theoretical Price of Forward in (A Time (t), Expiry date - Spot date Risk free interest rate (r) Market Value of Forward contract on Spot date$ 95.00 25 5/15/2019 10/15/2019 Market value of Forward contract at any date during contract period is 27 28 29 92.60difference between Price of underlying assets in cash market on that 0.419178particular date and present value of forward price on that date 0.03 (3.56)U28 21 22 B 23 -C30 Spot Price of on May 15th,2019 Spot date expiry date Theoretical Price of Forward in (A Time (t), Expiry date - Spot date Risk free interest rate (r) Market Value of Forward contract on Spot date 95 43600 43753 -C19 25 27 28 YEARFRAC(C25,C26,1 0.03 C27/EXP(C28 C29)-C24 30E46 DI 31 32 C) 0.60 34 35 36 $ $ Market Value of Forward contract on Spot date |$ 92.00 92.60 0.60 Theoretical Price of Forward in (A)C36 Vf-C35-C34 31 32 C) -C36 Spot Price of on expiry date Theoretical Price of Forward in (A) Market Value of Forward contract on Spot date 92 -C27 -C35-C34 34 35 36

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