Consider a non-dividend-paying stock with a current price of $50. A 6-month forward contract on the stock is available for purchase. The risk-free interest rate is 4% per annum, compounded continuously. An investor believes that in 6 months, the stock price will either increase by 20% or decrease by 10%. The investor also believes that there is a 60% probability of the stock price increasing and a 40% probability of the stock price decreasing. The investor is considering two strategies: 1. Strategy A: Buy the stock today and hold it for 6 months. 2. Strategy B: Buy the 6-month forward contract on the stock. Part 1: Calculate the forward price of the stock. Part 2: Calculate the expected stock price in 6 months and the expected payoff for each strategy. Part 3: Calculate the minimum amount the investor would be willing to pay for an option that would allow them to buy the stock in 6 months at the forward price.

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
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Consider a non-dividend-paying stock with a current price of $50. A 6-month
forward contract on the stock is available for purchase. The risk-free interest rate is 4% per
annum, compounded continuously.
An investor believes that in 6 months, the stock price will either increase by 20% or decrease
by 10%. The investor also believes that there is a 60% probability of the stock price increasing
and a 40% probability of the stock price decreasing.
The investor is considering two strategies:
1. Strategy A: Buy the stock today and hold it for 6 months.
2. Strategy B: Buy the 6-month forward contract on the stock.
Part 1: Calculate the forward price of the stock.
Part 2: Calculate the expected stock price in 6 months and the expected payoff for each strategy.
Part 3: Calculate the minimum amount the investor would be willing to pay for an option that
would allow them to buy the stock in 6 months at the forward price.

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