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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(i) A forward contract with 12 months to maturity is written on an underlying stock. The stock price is $45, and it is expected to pay dividends of $2 after 6 months and $3 immediately prior to maturity. 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. (ii) Provide a numerical example of an arbitrage strategy for situations where the forward is trading above, and below the theoretical forward price.
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