On January 1, 2021, you are holding 10,000 shares of rm ABC Inc., which are...
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On January 1, 2021, you are holding 10,000 shares of rm ABC Inc., which are trading at $50 per share (S0 = 50). ABC Inc. has announced that it will be paying a one-time dividend of I = $2 per share in 6 months on July 1, 2021. The term structure of risk-free interest rates is at and equal to 2% (continuous compounding). To hedge yourself against market risk and lock in the sales price of the shares in 1 year, you decide to enter into a forward contract on 10,000 shares of ABC Inc's stock, with delivery in a year.
(a) Do you need to take a long or a short position in the forward contract? Explain. [5 marks]
(b) What is a fair delivery price of such a forward contract? [10 marks]
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