Question $1$

A one$-$year forward contract on ABC stock is currently quoted for $34\mathrm{.}03$ in the market. The

current stock spot price is $35.$ The continuously compounded interest rate is $3\%$ per year.

A$.$ ABC stock pays regular dividends to shareholders. Explain how you could have inferred this

information from the traded market price of the forward contract $($no calculation required$).[5$

marks$]$

B$.$ Over the next year, ABC stock will pay one dividend. What is the present value of the

dividend that is consistent with the quoted price being arbitrage$-$free? $[4$ marks$]$

C$.$ If you believe that ABC will pay a single dividend of $2,$ explain when it is expected to be paid

$($i$.$e$.$ at which time $t_1$ is it being paid to shareholders$)?[4$ marks$]$

D$.$ Assume a trader erroneously quotes $33\mathrm{.}50$ for the forward contract. Show in an arbitrage

table how you can exploit the trader's price to make an arbitrage profit by trading one

forward contract. $[7$ marks$][$Use your result from B$.$ for $t_1.$ If you couldn't solve $B,$ then

assume $t_1=0\mathrm{.}5$ in your calculations$]$

$[$Hint: A$,$ B$,$ C and D can be answered independently$]$