Question

Pixar stock is expected to pay a single $1.7 dividend in 2.0 months. Suppose you enter into a 7.0 month forward contract to buy one share of Pixar stock when the share price is $40.4 per and the risk-free interest rate is 6.25 percent continuously compounded. What is the forward price

Answer 1

$40.16

Step-by-step explanation:

Present value of First Dividend:

= First Dividend * e^-rt

= $1.7 * e^(-0.0625*2/12)

= $1.7 * e^(-0.0625*0.1667)

= $1.7 * e^(-0.0104)

= $1.7 * 0.9896

= $1.68

Revised Spot Price = Spot Price - Present value of Dividend

Revised Spot Price = $40.4 - $1.68

Revised Spot Price = $38.72

Forward Price = Revised Spot price * e^rt

Forward Price = $38.72 * e^(0.0625*7/12)

Forward Price = $38.72 * e^(0.0625*0.5833)

Forward Price = $38.72 * e^(0.0365)

Forward Price = $38.72 * 1.0371

Forward Price = $40.1577

Forward Price = $40.16