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On Monday 18 November 2013, an investor takes a short position in a forward contract on Royal Dutch Shell shares with delivery on Tuesday 18 February 2014. The price of the shares at that time is $20.69. Shell intends to pay a dividend on Monday 16 December 2013. Assume that the dividend is $0.27 per share and that the risk-free interest rate is 0.5% (per annum, compounded continuously). You may use any sensible day-count convention (ignore this if you do not know what a day-count convention is).
(a) Find the forward price, assuming no arbitrage. Give your answer correct to four decimal places (e.g., $23.4567).
(b) Suppose that on the delivery date, 18 February 2014, a share costs $22.09. Is the investor better or worse off compared to somebody who did not enter into the forward contract, but just sold the stock on 18 February 2014? By how much?
what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)
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