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A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $10 and the risk-free rate of interest is 12% per annum with continuous compounding
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $10 and the risk-free rate of interest is 12% per annum with continuous compounding. a. What are the forward price and the initial value of the forward contract? b. Six months later, the price of the stock is $15 and the risk-free interest rate is still 12%. What are the forward price and the value of the forward contract?
Expert Solution
(1)Forward price F0 = 10*e^(12%)= 11.27496 and the initial value of forward contract is Zero.
(2) The delivery price in the contract is $11.27496.The value of the contract ,f,after six months is f=15-11.27496*e^(-0.12*6/12)=$4.381642
and the forward price will be F = 15*e^(12%*6/12) = $15.92754
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