1. A stock is expected to pay a dividend of $1 per share in two months...

    

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1. A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is currently traded at $50 per share, and the risk-free rate is 3% per annum with continuous compounding. (a) What is the 6-month futures price on the stock? What is the initial value of the futures contract to a long position holder? (b) If the 6-month futures price is traded at $48, What arbitrage strategy is possible? How does your answer change if the futures price is traded at $49? (c) In three months, if the stock price is traded at $46 and the term structure of interest rates is unchanged, What will the value of the short position in the current 6-month futures contract be? 1. A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is currently traded at $50 per share, and the risk-free rate is 3% per annum with continuous compounding. (a) What is the 6-month futures price on the stock? What is the initial value of the futures contract to a long position holder? (b) If the 6-month futures price is traded at $48, What arbitrage strategy is possible? How does your answer change if the futures price is traded at $49? (c) In three months, if the stock price is traded at $46 and the term structure of interest rates is unchanged, What will the value of the short position in the current 6-month futures contract be?

Answer rating: 100% (QA)

Solution Part a Finding the 6month futures price and initial value for a long position holder A Futures Price We can use the Cost of Carry Model to find the 6month futures price F D1 first dividend 1 ... View the full answer