Benjamin Templeton (BMT) was not expected to pay any dividend between time 0 and T At time 0, you overhear the CEO of saying that the company will issue a one time dividend of Ds 0 per share at time s T The dividend is unexpected and will be announced tomorrow Suppose that the continuously compounded interest rate is r 0 and it does not change over time Let S ( t ) represent the spot market price of BMT at time t and F ( t , T ) represent the forward price of BMT at time t with maturity T If you immediately buy 1 share of BMT stock at time 0 and sell it later at time T after s What is your profit Is it possible that you end up losing What is the forward premium at time 0 Is it positive Design an arbitrage strategy based on this piece of information Your strategy should involve a forward contract with maturity T of BMT stock Describe all your actions at time 0 and later Hint what would be the forward price if the dividend is expected

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Question: Benjamin Templeton (BMT) was not expected to pay any dividend between time 0 and T . At time 0, you overhear the CEO of saying

Benjamin Templeton (BMT) was not expected to pay any dividend between time 0 and T . At time 0, you overhear the CEO of saying that the company will issue a one-time dividend of Ds > 0 per share at time s < T. The dividend is unexpected and will be announced tomorrow. Suppose that the continuously compounded interest rate is r > 0 and it does not change over time. Let S(t) represent the spot market price of BMT at time t and F(t,T) represent the forward price of BMT at time t with maturity T .

If you immediately buy 1 share of BMT stock at time 0 and sell it later at time T after s. What is your profit? Is it possible that you end up losing?
What is the forward premium at time 0? Is it positive?
Design an arbitrage strategy based on this piece of information. Your strategy should involve a forward contract with maturity T of BMT stock. Describe all your actions at time 0 and later. Hint: what would be the forward price if the dividend is expected?

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