BUG's stock price S is $50 today.It pays a dividend of $0.25 after two months and $0.30 after five months.If the continuously compounded interest rate is 4 percent per year,then the forward price of a six-month forward contract on BUG is:

Question

Quizplus · Accepted Answer

Using the formula for the forward price of a contract, we have:

S_0e^(rt) = [D_1e^(r(T-t1)) + D_2e^(r(T-t2))]/(1+r)^2

where:
S_0 = current stock price = $50
r = continuous interest rate = 0.04
T = maturity of the forward contract = 6 months
t1 = time of first dividend payment = 2 months
t2 = time of second dividend payment = 5 months
D_1 = first dividend payment = $0.25
D_2 = second dividend payment = $0.30

Plugging in the values:

50e^(0.04*0.5) = [0.25e^(0.04*(6-2)) + 0.30e^(0.04*(6-5))]/(1+0.04)^2

Solving for S_0, we get:

S_0 = $50.46

Therefore, the answer is C.

BUG's Stock Price S Is $50 Today