Given Information:
A portfolio manager
owns XYZ Inc. which is currently trading a $35 per share.
He plans to sell the
stock in 120 days but is concerned about a possible price decline.
He decides to take a
short position in a 120 day FC (Forward Contract) on the stock.
The stock will pay a
$0.50 per share div. in 35 days & $0.50 again in 125 days.
The risk free rate is
4%.
What is the value of
the trader's position in the FC in 45 days, assuming the strike price is $27.50?
The answer for the above question was discussed in my previous
post. Now the question is amended for different situations as expressed below:
Scenario 1:
A portfolio manager
owns XYZ Inc. which is currently trading a $35 per share.
He plans to sell the
stock in 120 days but is concerned about a possible price decline.
He decides to take a
short position in a 120 day FC on the stock.
The stock will pay a
$0.50 per share div. on 35th day & another $0.50 again on 75th
day.
The risk free rate is
4%.
What is the value of
the trader's position in the FC in 75 days, assuming the strike price is $27.50?
NOW: Scenario (2):
A portfolio manager
owns XYZ Inc. which is currently trading a $35 per share.
He plans to sell the
stock in 120 days but is concerned about a possible price decline.
He decides to take a
short position in a 120 day FC on the stock.
The stock will pay a
$0.50 per share div. on 35th day & another $0.50 again on 75th
day.
The risk free rate is
4%.
What is the value of
the trader's position in the FC at the end of FC agreement period (on 120th
day), assuming the strike price is $27.50?
NOW: Scenario (3):
A portfolio manager
owns XYZ Inc. which is currently trading a $35 per share.
He plans to sell the
stock in 120 days but is concerned about a possible price decline.
He decides to take a
short position in a 120 day FC on the stock.
The stock will pay a
$0.50 per share div. on 35th day & another $0.50 again on 75th
day.
The risk free rate is
4%.
What is the value of
the trader's position in the FC at the start of FC agreement period (on 1st
day), assuming the strike price is
$27.50?
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