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

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