Question:
A buyer of a forward contract is obligated to pay the delivery price K for a share of the stock at the delivery time T.
1.) What is the value of a forward contract in terms of the current stock price, the interest rate, the delivery time, and the delivery price if the stock does not pay dividends? Use the basic assumptions on the market you have made to briefly explain the formula.
2.) Suppose that the interest rate r = 7% per year, the delivery price K = $15, and the delivery time T = 1 year. Suppose that at the end of the sixth month the stock price is $23. What is the value of the forward contract at the end of the sixth month?
3.) Suppose the stock pays dividends at the rate q. What is the value of the forward contract in terms of the current stock price, the interest rate, the dividend rate, the delivery time, and the delivery price? You do not need to justify your answer in this part.