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A stock pays a $1 dividend in 3 months’ time, and a second $1 in 6 months. The stock price is $40. The risk free rate is 10% per year (continuously compounded).
a. Compute the fair forward price of a contract that requires delivery in 7 months’ time. b. Four months later, the stock price is $30. What is the new forward price and what is the value of the
long position in the original forward contract?
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