Given: - Stock A will pay an unknown dividend at t = 1, and no dividends at
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Question:
Given:
- Stock A will pay an unknown dividend at t = 1, and no dividends at = 2.
- The price of stock A at t = 0 is 100 - r0,1 = 5% (annual rate with annual compounding)
- r0,2 = 6% (annual rate with annual compounding)
- The forward price on a 2-year forward contract on stock A is 99.
Now consider a long dividend swap that costs nothing to enter at t = 0 and pays a single cash flow at t = 1 equal to (Div_1 – SW) where Div_1 is the realization of the dividend that the company paid at t = 1 and SW is the swap price determined at t = 0. What is the value of SW assuming there is no arbitrage?
Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
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