Suppose a stock pays a quarterly dividend of $3. You plan to hold a short position in the stock across the dividend ex-date. What is your obligation on that date? If you are a taxable investor, what would you guess is the tax consequence of the payment? (In particular, would you expect the dividend to be tax deductible?) Suppose the company announces instead that the dividend is $5. Should you care that the dividend is different from what you expected?
Answer to relevant QuestionsSuppose XYZ stock has a price of $50 and pays no dividends. The effective annual interest rate is 10%. Draw payoff and profit diagrams for a long position in the stock. Verify that profit is 0 at a price in 1 year of $55. Suppose the stock price is $40 and the effective annual interest rate is 8%. Draw payoff and profit diagrams for the following options: a. 35-strike put with a premium of $1.53. b. 40-strike put with a premium of $3.26. c. ...A default-free zero-coupon bond costs $91 and will pay $100 at maturity in 1 year. What is the effective annual interest rate? What is the payoff diagram for the bond? The profit diagram? Draw profit diagrams for the following positions: a. 1050-strike S&R straddle. b. Written 950-strike S&R straddle. c. Simultaneous purchase of a 1050-strike straddle and sale of a 950-strike S&R straddle. Suppose you buy theS&Rindex for $1000 and buy a 950-strike put. Construct payoff and profit diagrams for this position.Verify that you obtain the same payoff and profit diagram by investing $931.37 in zero-coupon bonds and ...
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