Explanation:
The forward price, initially when the contract is initiated, is given by: K = S(1 + R)^T = 33(1.05)^2 = \`$36.38`
After one-year, the forward price is given by: F = S(1 + R)^T = 35(1.06)^1 = \`$37.10`
The value of the forward contract is:
Q.4900 Paul enters into a two-year forward contract on a stock that pays no dividends and that the current stock price is USD 33 and the annually-compounded risk-free rate is 5% per year. Suppose that one year after the forward contract was initiated, the spot price is USD 35, and the risk-free rate has changed to 6% per annum. What is the value of this forward contract?
A
2.22
B
0.68
C
1.90
D
2.33
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