Given:

- Stock A will pay an unknown dividend at t = 1, and no dividends at = 2.

- The price of stock A at t = 0 is 100 - r0,1 = 5% (annual rate with annual compounding)

- r0,2 = 6% (annual rate with annual compounding)

- The forward price on a 2-year forward contract on stock A is 99.

Now consider a long dividend swap that costs nothing to enter at t = 0 and pays a single cash flow at t = 1 equal to (Div_1 – SW) where Div_1 is the realization of the dividend that the company paid at t = 1 and SW is the swap price determined at t = 0. What is the value of SW assuming there is no arbitrage?

Answer rating: 100% (QA)

The value of SW is equal to the dividend paid at t 1 Explanation Assuming there i... View the full answer