1) A $34 stock pays a continuous dividend of 9%. The continuously compounded ris

Question

1)  

A $34 stock pays a continuous dividend of 9%. The continuously compounded risk-free rate is 8%. What is the price of a prepaid forward contract that expires 12 months from today?

$37.20

$34.34

$33.66

$31.07

$32.08

2)

A $65 stock pays a continuous dividend of 8%. The continuously compounded risk-free rate is 9%. What is the price of a forward contract that expires 4 months from today?

$66.76

$63.29

$63.56

$64.78

$65.22

Please show me necessary formulas and step by step on how to get the correct answer. Thank you!

A $34 stock pays a continuous dividend of 9%. The continuously compounded risk-free rate is 8%. What is the price of a prepaid forward contract that expires 12 months from today?

Answers: a.

$37.20

b.

$34.34

c.

$33.66

d.

$31.07

e.

$32.08

2)

A $65 stock pays a continuous dividend of 8%. The continuously compounded risk-free rate is 9%. What is the price of a forward contract that expires 4 months from today?

Answers: a.

$66.76

b.

$63.29

c.

$63.56

d.

$64.78

e.

$65.22

Please show me necessary formulas and step by step on how to get the correct answer. Thank you!

Explanation / Answer

A $34 stock pays a continuous dividend of 9%. The continuously compounded risk-free rate is 8%. What is the price of a prepaid forward contract that expires 12 months from today? F P = S0 x e-(r??)T Forward Prepaid cost = $34 x e -(9%-8%) $33.66 A $65 stock pays a continuous dividend of 8%. The continuously compounded risk-free rate is 9%. What is the price of a forward contract that expires 4 months from today? F0,T = S0e(r??)T Forward price = $65 x Exp (9%-8%) *(4/12) $65.22

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