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A stock purchase contract with a zero initial premium calls for you to pay for one share of stock in 3 years. The stock price is $100 and the 3-year interest rate is 3%. a. If you expect the stock

A stock purchase contract with a zero initial premium calls for you to pay for one share of stock in 3 years. The stock price is $100 and the 3-year interest rate is 3%.
a. If you expect the stock to have a zero dividend yield, what price in 3 years would you agree to pay for the stock?
b. If the stock has a 2% dividend yield, what price in 3 years would you agree to pay for the stock?
c. Now suppose that the stock purchase contract calls for you to pay $100 in 3 years for one share of stock. What annual payment on the stock purchase contract would be fair if the dividend yield on the stock is zero? What if it is 4%? 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...

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a We have to value a forward contract with a dividend yield of zero We know that the price for such …View the full answer


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Related Book For  answer-question
Derivatives Markets

Derivatives Markets

ISBN: 978-0321543080

4th edition

Authors: Rober L. Macdonald

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Posted Date: December 18, 2015 05:10:13
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