Forward Contract Question

Hey guys, I keep getting the wrong anwser but it seems like a simple problem, although perhaps I am doing something wrong with CC. It is from book 5. A one-year long forward contract on a non-dividend paying stock is entered into when the stock price is $40, and the risk-free interest rate is 10% per annum with continuous compounding. (a). What are the forward price and the initial value of the forward contract. (b). Six months later, the price of the stock is $45, and the risk-free interest rate is still 10%. What are the forward price and the value of the forward contract.

Hmm, the continous compounding throws me for a loop. Post the anwsers if you can.

Continuous compounding just means you use e^(rt) where e is that 2.71828 number…

a) forward price = S*e(rt) = 40*exp(10%*1)=44.21, intial value = 0 b) forward price is the same because it is defined at contract initiation, value = 45 - 44.21*exp(-10%*0.5)= 2.95

Good thing I told maratikus about that 2.71828 number.

thanks, Joey. easy way to remember e = 2.7 1828 1828 45 90 45 //the angles of right angle triangle help remember 6 more digits.

maratikus, I want to know the reason of using -10% instead of 10% for part b. Thanks!

Since we are on the topic of future options, I was thinking about the subject and wondered do options prices increase or decrease the futures price if a party with a short position in a futures contract sometimes has options as to the precise asset that will be delivered, where delivery will take place, etc??? Anyone have any idea?

maratikus Wrote: ------------------------------------------------------- > thanks, Joey. easy way to remember e = 2.7 1828 > 1828 45 90 45 //the angles of right angle triangle > help remember 6 more digits. :slight_smile:

Maraticus, how do you get the 2.95 its not working of for me. forward price is the same because it is defined at contract initiation, value = 45 - 44.21*exp(-10%*0.5)= 2.95

value = present value of stock - present value of forward = 45 - 44.21*exp(-10%*0.5)=2.95 does that help?