A forward contract with 8 months to maturity is written on an underlying share. The market price of the share is $34, and it is expected to pay dividends of $1.40 after 2 months and $2 immediately prior to maturity of the forward. The relevant riskless rate of interest is 4%. Calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship.
A forward contract with 8 months to maturity is written on an underlying share. The market price of the share is $34, and it is expected to pay dividends of $1.40 after 2 months and $2 immediately prior to maturity of the forward. The relevant riskless rate of interest is 4%. Calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A forward contract with 8 months to maturity is written on an underlying share. The market price of the share is $34, and it is expected to pay dividends of $1.40 after 2 months and $2 immediately prior to maturity of the forward. The relevant riskless rate of interest is 4%. Calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship.
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