Tim invested in a long position in a forward contract on 100 shares of stock ABC on Sep 1st 2012 with a maturity of 12 months (that is, the delivery date of the forward contract is Sep 1st, 2013). The forward price on the contract is $104.08 per share. Stock ABC is not expected to pay any dividend before the maturity of the forward contract. The continuously compounded interest rate is 4% per year.
1. What is the value of Tim’s forward contract on 100 shares of stock ABC on March 1st, 2013 (note that the price of Tim’s contract is $104.08 per share)?
Hint: Under forward contracts, payments are not made until the maturity of the contract, which is Sep 2013. However, suppose Tim needs to report the profit and/or loss of his positions by March 1, 2013, what would he report? Another way to think about this questions is, suppose Tim wants to sell the forward contract to someone else, how much can he charge for it?
2. Assume now on March 1st 2013, the price of ABC stock is $98 per share. What is the no arbitrage price of a forward contract on stock ABC with six months of maturity on March 1st 2013? What is the value of Tim’s forward contract on 100 shares of stock ABC on March 1st 2013 if the stock price is $98?