Question

Consider a 10 -month forward contract on a stock when the stock price is GH®6 Assume that the risk-free interest rate (continuously compounded) is 6% per annu for all maturities. Assume that divides of GH0.95 per share are expected in months 6and 9 months. What is the forward price?

Answer 1

A forward contract is an agreement between two parties to buy or sell an asset at an agreed-upon price in the future. The forward price can be determined using the formula: Forward Price = Spot Price - Present Value of Dividends.

Step-by-step explanation:

A forward contract is an agreement between two parties to buy or sell an asset at an agreed-upon price in the future. In this case, we have a 10-month forward contract on a stock. To determine the forward price, we need to take into account the dividends that are expected to be paid out during the contract period.

The forward price formula is:

Forward Price = Spot Price - Present Value of Dividends

Since dividends of GH¢0.95 per share are expected in months 6 and 9, we need to calculate the present value of these dividends using the risk-free interest rate. Once we have the present value, we subtract it from the spot price to find the forward price.