Stock A has a spot price of $50. It is expected to appreciate by 2% over the next quarter. The risk-free rate for the next quarter is 2% in continuously-compounded and annualized terms, and the quarterly continuous dividend payment is also 2% in continuously-compounded and annualized terms. The three-month forward price is
A) $50.00
B) $50.25
C) $50.50
D) $50.75

Question

Quizplus · Accepted Answer

The forward price formula considering continuous compounding is $F = S_0e^{(r-q)T}$, where $S_0$ is the spot price, $r$ is the risk-free rate, $q$ is the dividend yield, and $T$ is the time to maturity in years. Here, $S_0 = 50$, $r = 0.02$, $q = 0.02$, and $T = 0.25$ (for three months). Plugging these values in, we get $F = 50e^{(0.02-0.02)0.25} = 50e^0 = 50$.

Stock a Has a Spot Price of $50