AAEC
HW2-AAEC4870-Spring17

Bring down the information from the previous table

• 8

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to offset your hedge. Bring down the information from the previous table and complete the remainder of the table below. Cash market Futures market Basis Jul ____________ ____________ ____________ Oct ____________ ____________ ____________ Cash sale price ____________ Gain/loss on futures position ____________ Net sales price ____________

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7 23) (12p) A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is \$40 and the risk-free rate of interest is 10% per annum with continuous compounding. a) What are the forward price and the initial value of the forward contract? b) Six months later, the price of the stock is \$45 and the risk-free interest rate is still 10%. What are the forward price and the value of the forward contract? 24) (8p) The current price of silver is \$15 per ounce. The storage costs are \$0.24 per ounce per year payable quarterly in advance. Assuming that interest rates are 10% per annum for all maturities, calculate the futures price of silver for delivery in nine months.
8 25) (16p) A stock is expected to pay a dividend of \$2 per share in three months and in seven months. The stock price is \$60, and the risk-free rate of interest is 4% per year with continuous compounding for all maturities. An investor has just taken a long position in a nine-month forward contract on the stock. a) What are the forward price and the initial value of the forward contract? b) Five months later, the price of the stock is \$56 and the risk-free rate of interest is still 4% per year. What are the forward price and the value of the long position in the forward contract?
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• Spring '17
• Karali
• Forward contract

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