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A stock is expected to pay a dividend of $1 per share in two months...

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Finance

A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $80, and the risk-free rate of interest is 10% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock.

  1. What are the forward price and the initial value of the forward contract?
  2. Three months later, the price of the stock is $60 and the risk-free rate of interest is still 10% per annum. What are the forward price and the value of the short position in the forward contract?

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