Question

The current spot price of a stock is $30 and the risk-free rate for all maturities (with continuous compounding) is 10% per annum. It is known that the stock will pay a cash dividend of $2 at the end of the first year and a cash dividend of $3 at the end of the second year. What is the three-year forward price of the asset

Answer 1

Answer:

$34.74

Explanation:

Three year forward Rate = Spot Rate * e^(10%*3) -Dividend Year 1 *e^(10%*2) -Dividend Year 2 * e^(10%*1)

Three year forward Rate = 30*e^(10%*3) - 2*e^(10%*2) - 3*e^(10%*1)

Three year forward Rate = 30*1.3498588 - 2*1.2214028 - 3*1.1051709

Three year forward Rate = 40.495764 - 2.4428056 - 3.3155127

Three year forward Rate = 34.7374457

Three year forward Rate = 34.74

Thus, the three-year forward price of the asset is $34.74