Answered: Both statements are incorrect.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 2P

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A stock is expected to pay a dividend of $1 per share in 2 months. An investor purchased a forward contract on the stock at a forward price of $50 some time ago. The contract now has 3 months to its delivery date. The stock is currently trading at $55 and the risk free rate is 4% on a continuously compounded basis. Consider the following statements. I. The price of a forward contract on the stock with 3 months to the delivery date is $54.55 II. The value of the investor’s forward position is $5.50 Which of the following is correct? (No excel pls) a. Statement I is incorrect, Statement II is correct. b. Both statements are correct. c. Both statements are incorrect. d. Statement I is correct, Statement II is incorrect.

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