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Consider an 11 month forward contract on a stock A when the stock price is 59$
Consider an 11 month forward contract on a stock A when the stock price is 59$. We assume that the risk free rate of interest continuously compounded is 7.5% per annum for all maturities. we also assume that the dividends of 3.4$ per share are expected after 3 months, six months, nine months and twelve months. what should be the forward price ?
Expert Solution
The forward price of the contract =(stock price-present value of dividend)*e^rate*Time
Since the contarct is 11 month so we would only consider the dividend in 4 month
Present value of dividend= 3.4*e^(0.075*3/12)
=3.4*1.0189 = 3.464
Forward price= (59-3.4860)*e^(0.075*6/12)
= 55.514*e^(0.075*6/12)
= 55.514*1.0382
=57.6346
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