Final answer:
To compute the value of a short position in an 11-month forward contract when the underlying stock index decreases, we must consider the loss which is the difference in the index values. This does not account for any potential changes in the risk-free rate or dividend yield following the immediate decrease in the index value.
Step-by-step explanation:
The subject of this question is Business, more specifically it pertains to financial derivatives and forward contracts. To calculate the value of a short position in an 11-month forward contract when the underlying stock index decreases from 4,079 to 4,062, we need to take into account the continuous dividend yield and the risk-free rate. The forward price of the contract would have been calculated at inception using the initial value of the stock index, the risk-free rate, and the dividend yield.
However, since the stock index has decreased immediately after the contract's inception, the loss on the short position would be the difference in the stock index value (i.e., 4,079 - 4,062 = 17). As the forward contract is a zero-sum game, this loss would be theoretically offset by any gains made by the holder of the long position. Therefore, the immediate value of the short position is a loss of 17 index points, which needs to be recalculated into monetary terms based on the contract specifications. This calculation does not take into account any time value adjustments or changes in the risk-free rate or the dividend yield, given that the index changed value immediately after the contract was entered.