IBM’s share price is $135.76, it pays a dividend each quarter of $1.64 per share, and the next dividend is due Dec 10, which you can take to be exactly 1 quarter from now. For simplicity, we work using Street usage: the rate of interest is 2.4% per annum with quarterly compounding which implies that the quarterly rate of interest is 0.024/4 = 0.006 = 0.6%. Take that rate to be the rate at which you can both borrow and lend. Find the forward price of IBM that expires (a) after 3 quarters and (b) after 4 quarters. In each case, you can assume that the forward expires
immediately after the third or fourth dividend is paid.

Now suppose that the price of IBM is $150/share at the close on Dec 9th; it pays a dividend of $1.64 to holders of shares on the next morning when it is considered to trade ex-dividend (without the right to receive the dividend). What should happen to the price of a forward contract (say with 2 months to go on Dec 10) on IBM before and after IBM “goes ex dividend”? [Hint: your answer will not depend on the rate of interest in effect at that time, so make any assumption regarding the rate and compute the price just before and after!]

Answer rating: 100% (QA)

The price of the spot 15376 Dividend per quarter 164 When a stock is on exdividend the stock price d... View the full answer