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Consider a 1-year long forward contract on a stock that pays a single dividend payment right before the maturity date.

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Consider a 1-year long forward contract on a stock that pays a single dividend payment right before the maturity date. The initial stock price is $110, and the effective annual risk-free interest rate is 5%. The forward market price is $109.5.

a) What dividend payment is implied by this forward price?

b) Suppose you believe the dividend payment in 1 year will be only $4. What arbitrage would you undertake?

c) Suppose you believe the dividend payment in 1 year will be $8. What arbitrage would you undertake?

Expert Answer:

Answer rating: 100% (QA)

a To determine the implied dividend payment calculate the present value of the dividend payment using the forward price The forward price represents t View the full answer


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Related Book For  answer-question
Income Tax Fundamentals 2013

Income Tax Fundamentals 2013

ISBN: 9781285586618

31st Edition

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

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Posted Date: September 06, 2023 08:29:25
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