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Consider XYZ stock currently worth $95. On Jan 15, 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 1sth, 2019. Assume that the risk-free interest rate will remain at 3.090 p.a. 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 NO dividend in 9 months. A) Calculate the theoretical price of the forward today? (2 points) B) Ans: B) Suppose you took the short position at the forward price of S99. What will be your annualized rate of return? (2 points) C) Suppose you took the short position at the forward price computed in (A) above. On Apr 15h, 2019, the spot price of the asset is $94. What is the market value of your short position in the forward contract at this point? (2 points) C) Ans: D)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) E) Suppose you took the short position at the forward price computed in (A) above. What will be your annualized rate of return at expiration? (2 point) D) Ans: E) Ans:

Please use excel to do it.

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Answer #1

Please find below spreadsheet for calculations and answer

97.16 Stock Spot Price(S Current date expiry date Theoretical Price of Forward Risk free Interest (r Time(t) Theoretical Price of Forward $ 95.00 1/15/2019 10/15/2019 SeArt 4 3% 0.74794521 $ 97.16 12 B) 13 5.63% $ 95.00 1/15/2019 10/15/2019 0.74794521 Stock Spot Price(S) Current date expiry date Time(t Short Position of forward at Return on expiration date Return (%) Annualized rate of return(%) 17 19 20 21 $4.00 4.21% 5.63% 23 C 1.71 Spot Price of on April 15th,2019 Spot date expiry date Theoretical Price of Forward Time (t), Expiry date - Spot date Risk free interest rate (r) Market Value of Forward contract on Spot date $ 94.00 Market value of Forward contract 4/15/2019 at any date during contract 10/15/2019period is difference between S 97.16 Price of underlying assets in cash 25 27 0.50 market on that particular date 0.03 and present value of forward 30 31 32 | S1.71 price on that date

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