Answer:
The equivalent continuously compounding rate is 0.02%
Explanation:
Forward price of the contract in 3 months:
F = S x e^(r*t)
Expected equity market return of the stock in 3 months:
E(r) = F/S -1 = e^(r*t) -1 = e^(8%*1/4) - 1 = 0.0202 or 2.02%
Annual market rate or Annual market rate premium with rf as the risk-free interest rate per annum with quarterly compounding.
r = E(r) - rf = 2.02% - 8%/4 = 0.02%
The quarterly compounded rate (rq) is given by:
rq= 4 x [(r/2 + 1)^(1/2) - 1]
where r as the annual market risk rate.
Apply the above formula to the question:
rq=4 x [(0.02%/2 + 1)^(1/2) -1] = 0.0002 or 0.02%
