Suppose XYZ stock pays no dividends and has a current
Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year effective annual interest rate is 10%.
a. Graph the payoff and profit diagrams for a forward contract on XYZ stock with a forward price of $55.
b. Is there any advantage to investing in the stock or the forward contract? Why?
c. Suppose XYZ paid a dividend of $2 per year and everything else stayed the same. Now is there any advantage to investing in the stock or the forward contract? Why?
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