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An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. What is the investor's profit or loss? a. $400 loss b. $700 gain c. $300 loss d. $400 gain e. $700 loss An exchange rate is 0.700 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate? a. 0.6738 b. 0.7120 c. 0.6800 d. 0.7030 e. 0.6930

Respuesta :

Answer:

d. $400 gain

e. 0.6930

Explanation:

The computation is shown below:

a. For investor profit or loss

= (100 shares × $50 ) - (100 shares × $43) - ( 100 shares × $3)

= $5,000 - $4,300 - $300

= $400 gain

The dividend amount and the share price after six month is deducted from the total value

b. The six-month forward rate

= Spot risk-free interest Rate or Foreign risk-free interest Rate × e^(Domestic risk-free interest Rate - Foreign risk-free interest  Rate) × Domestic risk-free interest Rate

= 7% × e^(5% - 7%) × 5%

= 7% × e^-0.001

= 7% × 0.99

= 0.6930

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