On Jan. 1, 2022, you entered a one-year-long forward contract right after the stock paid its...
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On Jan. 1, 2022, you entered a one-year-long forward contract right after the stock paid its dividend. The stock price was at $50 when you initiated the forward contract, and the risk-free rate is 10% per annum with continuous compounding. The stock pays a quarterly dividend of $1 at the end of each calendar quarter (ie. March 31, June 30, Sep 30, and Dec. 31). (a) What are the fair forward price? (b) Suppose on Jan. 1. 2022, your friend came to you, wanting to buy the stock from you one year later for a pre-agreed price of $53, would you be happy to sign the contract with him/her today? Why or why not? If you do sign the contract, how can you make an arbitrage profit? Be specific about your trading strategy. On Jan. 1, 2022, you entered a one-year-long forward contract right after the stock paid its dividend. The stock price was at $50 when you initiated the forward contract, and the risk-free rate is 10% per annum with continuous compounding. The stock pays a quarterly dividend of $1 at the end of each calendar quarter (ie. March 31, June 30, Sep 30, and Dec. 31). (a) What are the fair forward price? (b) Suppose on Jan. 1. 2022, your friend came to you, wanting to buy the stock from you one year later for a pre-agreed price of $53, would you be happy to sign the contract with him/her today? Why or why not? If you do sign the contract, how can you make an arbitrage profit? Be specific about your trading strategy.
Expert Answer:
Answer rating: 100% (QA)
a To determine the fair forward price we need to take into account the future value of the stock price and the present value of the expected dividends ... View the full answer
Related Book For
Advanced Accounting
ISBN: 978-0077431808
10th edition
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
Posted Date:
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