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(Solved): 6) As of January 1 , the price of a stock is $160. A dividend payment of $2.5 is made on each of May ...



6)

As of January 1 , the price of a stock is \( \$ 160 \). A dividend payment of \( \$ 2.5 \) is made on each of May 1, July 1 ,
As of January 1 , the price of a stock is . A dividend payment of is made on each of May 1, July 1 , and December 1. Let the risk-free continuously compounded interest rate be . Kate believes the price of the stock is going to increase, and, therefore, she takes a long position in a one-year forward contract on the stock. a) Find the forward price of the stock for delivery in one year: b) On June 1 , the stock price has risen to . What is the current fair value of the forward contract initiated on January 1 ? c) On June 1, Kate feels that now is the time to cash out. Explain how she can use a second forward contract (issued on June 1) to lock in a risk-free profit. On June 1, Kate should enter a forward contract with a delivery price of The risk-free profit realized on January 1 next year is d) In fact, Kate did not enter a second forward on June 1. On September 1, the stock price has fallen to . She is now concerned that the stock price would keep falling. Explain how she can use a second forward contract (issued on September 1) to lock in her loss. On September 1, Kate should enter a forward contract with a delivery price of The loss realized on January 1 next year is Note: Round any dollar values to the closest cent at every intermediate step.


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a) To find the forward price of the stock for delivery in one year, we need to use the formula:F = S0 * e^(r*T) - PV(D)where:F is the forward priceS0
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