Question
In: Finance
Consider a stock that pays no dividends and currently sells for S0. The forward on this...
Consider a stock that pays no dividends and currently sells for S0. The forward on this stock for date-T delivery has the forward price F0 that is greater than S0erT . Suppose that short selling for this stock is NOT allowed in the market. For the forward, we can either long or short. Here, we can make an arbitrage Is this true or false?
Solutions
Expert Solution
True. We can borrow money to buy the stock today at S0. We will have to pay back S0exp(rt) at the end of the period. We will also go short on the forward and hence sell the stock later at a price greater than S0exp(rt) hence we will make a profit in this way
jeff jeffy answered 2 years agoRelated Solutions
A stock currently sells for $80, and it will pay no dividends in the future. Consider...
A stock currently sells for $80, and it will pay no dividends in
the future.
Consider a 2-year forward contract on this stock.
The forward price is $90. The risk-free rate is 3% per
annum.
Is there an arbitrage?
If so, show the arbitrage strategy using a table listing asset
positions and cash flows.
A stock currently trades at $50. It pays dividends at a rate of 2%, and the...
A stock currently trades at $50. It pays dividends at a rate of
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Calculate the implied volatility of the underlying stock.
Calculate the volatility of the call option.
(No Excel work. Please show step by step with formula)
Suppose ABC stock pays no dividends and has a current price of $50. The forward price...
Suppose ABC stock pays no dividends and has a current price of
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1-year effective annual interest rate is 10%.
(a) Graph the payoff and profit diagrams for the one year
forward contract.
(b) Is there any advantage to investing in the stock or the
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(c) Suppose ABC paid a dividend of $2 per year and everything
else stayed the same. Now is there any...
Assume a stock currently pays no dividends today, but expected to begin paying dividends $6 per...
Assume a stock currently pays no dividends today, but expected
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Assume a stock currently pays no dividends today, but expected to begin paying dividends $8 per...
Assume a stock currently pays no dividends today, but expected
to begin paying dividends $8 per share in 3 years. The dividends
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firm has a cost of equity of 11.6%. Using the dividend discount
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Moutainbrook Company stock is is currently trading at $44 per share. The stock pays no dividends....
Moutainbrook Company stock is is currently trading at $44 per
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rate is 6% per year. A three-year European call option on
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Black-Scholes-Merton model, find the premium per share to four
decimal places.
(a) Consider a stock that pays annual dividends. It just paid $4.50 dividends per share, and...
(a) Consider a stock that pays
annual dividends. It just paid $4.50 dividends per share, and the
next dividend will be paid in 1 year. The dividends are expected to
remain constant at $4.50 per share for the next 10 years, after
which the dividends are expected to decrease at a rate of 0.5% per
year. The annual cost-of-capital is 15.50%. Find the fair value of
the stock today.
(b) Consider the same stock as
described in part (a), except...
(a) Consider a stock that pays annual dividends. It just paid $4.50 dividends per share, and...
(a) Consider a stock that pays annual dividends. It just paid
$4.50 dividends per share, and the next dividend will be paid in 1
year. The dividends are expected to remain constant at $4.50 per
share for the next 10 years, after which the dividends are expected
to decrease at a rate of 0.5% per year. The annual cost-of-capital
is 15.50%. Find the fair value of the stock today.
(b) Consider the same stock as described in part (a), except...
(a) Consider a stock that pays annual dividends. It just paid $4.50 dividends per share, and...
(a) Consider a stock that pays
annual dividends. It just paid $4.50 dividends per share, and the
next dividend will be paid in 1 year. The dividends are expected to
remain constant at $4.50 per share for the next 10 years, after
which the dividends are expected to decrease at a rate of 0.5% per
year. The annual cost-of-capital is 15.50%. Find the fair value of
the stock today.
(b) Consider the same stock as
described in part (a), except...
Preferred stock A pays dividends quarterly. Preferred stock B pays dividends annually. All else equal, which...
Preferred stock A pays dividends quarterly. Preferred stock B
pays dividends annually. All else equal, which will have the higher
value?
A
B
A=B
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