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You want to short a 6-month forward contract on a stock. You contacted your bank and were offered a forward

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 You want to short a 6-month forward contract on a stock. You contacted your bank and were offered a forward price of $39.85 [Note: This forward price is available only to customers who want to take a short position. Customers who want to take a long position will get a different quote.]. You also observe the following information: - Current price of the stock = $40 - Expected dividend on the stock = $0.50, payable 3 months from now - Your spot 3-month lending rate = 2.50% p.a. [i.e., This is the rate that you will get if you lend money for 3 months, starting now.] - Your spot 3-month borrowing rate = 4.00% p.a. [i.e., This is the rate that you will have to pay if you borrow money for 3 months, starting now.] - Your transaction cost in buying one stock in the spot market = $0.10, payable at the time of the transaction. - Your transaction cost in short selling one stock in the spot market = $0.20, payable at the time of the transaction (This already includes the transaction cost for closing out the short-sale transaction). 


What is the minimum 6-month spot lending rate that you need to get in order for you to reject the bank's offer?  

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To determine the minimum 6 month spot lending rate that would make you reject the bank s offer for 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: August 24, 2023 04:24:44
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