As of January 1, the price of a stock is $195. A dividend payment of $3 is made on each of March 1, July 1, and October 1. Let the risk-free continuously compounded interest rate be 7.5%. Kate believes the price of the stock is going to increase, and, therefore, she takes a long position in a one-year forward contract on the stock.
a) Find the forward price of the stock for delivery in one year: $
b) On June 1, the stock price has risen to $280. What is the current fair value of the forward contract initiated on January 1? $
On June 1, Kate feels that now is the time to cash out. Explain how she can use a second forward contract (issued on June 1) to lock in a risk-free profit. On June 1, Kate should enter a _______(long or short) ______ (6month, 7month, 12month) forward contract with a delivery price of $:
The risk-free profit realized on January 1 next year is $
d) In fact, Kate did not enter a second forward on June 1. On September 1, the stock price has fallen to $135. She is now concerned that the stock price would keep falling. Explain how she can use a second forward contract (issued on September 1) to lock in her loss.
On September 1, Kate should enter a _______(long or short) _______ (4 month, 6month, 12month) forward contract with a delivery price of $:
The loss realized on January 1 next year is $