A share of Amazon stock is currently selling for $1,405. You plan to purchase your first share in one year in honor of your 22nd birthday. You are concerned that the price will rise by then. To hedge this risk, you enter into a forward contract to buy one share of Amazon stock in one year. Assume that the risk-free rate is 3.5% (APR, semi-annual compounding).
• Calculate the appropriate price at which you can contract to buy the asset in one year. Assume continous compounding.
• Assume that eight months into the contract, interest rates increased by 75bp and the AMZN stock price is $1,400. Calculate your gain or loss from the forward contract. Assume continous compounding.
• Suppose that at expiration, the price of the stock is $1,500. Calculate your gain or loss from the forward contract.