Question

It costs $1 to buy a forward contract that has been initiated. The contract will deliver one share of the underlying stock in 6 months from now for F = 110. Current price of the underlying stock is $108, and interest rate is r yield of the stock 10% continuously compounded. Find the continuous dividend 41 7- 12 Mulhy F-10 08

Answer 1

6 month risk free rate=e^(10%*6/12) -1=5.127%

Value of stock after 6 month should be atleast 108*1.05127=$113.54

So, Net profit after 6 month (113.40-110)-1=$2.4 i.e. 2.4/108 or 2.22% in 6 month or ((1+2.22%)^2-1) or  4.489%

So, continuous dividend yield is 4.489%