Question

Consider a 10-month forward contract on 100 shares of stock when the stock price is $50. The risk-free interest rate is continuously compounded at 8% per annum for all maturities. Dividends of $0.75 per share are expected after 3 months, 6 months, and 9 months. What should be the equilibrium forward price now?

Answer 1

To calculate the equilibrium forward price in a 10-month forward contract on 100 shares of stock, you need to consider the present value of the future dividends and the continuously compounded risk-free interest rate. Given the stock price, dividends, and interest rate, you can calculate the present value of dividends and use it in the formula to determine the equilibrium forward price.

Step-by-step explanation:

To calculate the equilibrium forward price, we need to consider the present value of the future dividends and the continuously compounded risk-free interest rate. The formula to calculate the equilibrium forward price is:

Forward Price = (Stock Price + Present Value of Dividends) * e^(interest rate * time)

Given that the stock price is $50, the dividends are $0.75 per share after 3, 6, and 9 months, and the interest rate is 8% per annum, we can calculate the present value of the dividends using the formula:

Present Value of Dividends = Dividend / e^(interest rate * time)

Substituting the values into the equations, we can determine the equilibrium forward price.