Assume that you purchase a dividend-paying stock today which currently worth RM 150. The stock pays...

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Assume that you purchase a dividend-paying stock today which currently worth RM 150. The stock pays quarterly dividends of RM 1.25 per quarter, with the next dividend to be paid two months from now. You plan to sell the stock exactly after 1 year. In order to hedge against a possible price decline, at the same time, you take a short position in a forward contract that expires 1 year. The risk-free rate is 5.25% per annum. (a) Determine the forward price of the contract on the dividend-paying stock established today and expiring in 1 year. (2 marks) (b) It is now 6 months since you entered the forward contract. The stock price now is RM 115. Determine the value of the short forward contract at this point. (3 marks) (c) If at expiration, the price of the dividend-paying stock is RM 150. Determine the value of the short forward contract at expiration. (1 mark) (d) Draw the payoff diagram of your position at expiration. (e) Draw the profit diagram of your position at expiration. (2 marks) (2 marks) Assume that you purchase a dividend-paying stock today which currently worth RM 150. The stock pays quarterly dividends of RM 1.25 per quarter, with the next dividend to be paid two months from now. You plan to sell the stock exactly after 1 year. In order to hedge against a possible price decline, at the same time, you take a short position in a forward contract that expires 1 year. The risk-free rate is 5.25% per annum. (a) Determine the forward price of the contract on the dividend-paying stock established today and expiring in 1 year. (2 marks) (b) It is now 6 months since you entered the forward contract. The stock price now is RM 115. Determine the value of the short forward contract at this point. (3 marks) (c) If at expiration, the price of the dividend-paying stock is RM 150. Determine the value of the short forward contract at expiration. (1 mark) (d) Draw the payoff diagram of your position at expiration. (e) Draw the profit diagram of your position at expiration. (2 marks) (2 marks)

Answer rating: 100% (QA)

a To determine the forward price of the dividendpaying stock we can use the following formula Forwar... View the full answer