Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for

Question:

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?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...