Question

In: Finance

7. A BCD stock pays an 8% continuous dividend. The current price is $50 and the...

7. A BCD stock pays an 8% continuous dividend. The current price is $50 and the continuously compounded risk-free rate is 6%. What is the price of a prepaid forward contract that expires 1 year from today? What is the price of a forward contract that expires at the same time?

Solutions

Expert Solution

Spot Price = $50 | Risk-free rate = 6% | Continous Dividend = 8% | Time to expiry = 1 year

Price of Prepaid Forward contract is price paid today for a contract where stocks would be received at the end of Year 1. It is essentially Spot price - Dividends missed out.

Therefore, Price of Prepaid Forward Contract formula = Spot Price * e-Dividend Yield * T

Price of a Prepaid Forward Contract = 50 * e-8% * 1 ----------------------(Continuous dividend of 8%)

Price of a Prepaid Forward Contract = 50 * 0.92312

Price of a Prepaid Forward Contract for ABCD stock expiring in 1 year = $ 46.16

The Price of a Forward contract is the price of the stock continuously compounded at risk-free rate minus the Dividends missed out.

Therefore, Price of a Forward Contract formula = Spot Price * eRisk-free rate -Dividend Yield * T

Price of a Forward Contract = 50 * e(6% - 8%) * 1

Price of a Forward Contract = 50 * e-2%

Price of a Forward Contract = 50 * 0.98020

Price of a Forward Contract for ABCD stock expiring in 1 year = $ 49.01

Hence, Price of a Prepaid Forward Contract is $ 46.16 and Price of a Forward contract is $ 49.01


Related Solutions

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 $50. The forward price for delivery in 1 year is $55. Suppose the 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 forward contract? Why? (c) Suppose ABC paid a dividend of $2 per year and everything else stayed the same. Now is there any...
Question 8 A non – dividend – paying stock with a current price of £104, the...
Question 8 A non – dividend – paying stock with a current price of £104, the strike price is £100, the volatility is 30% pa, the risk-free interest rate is 12% pa, and the time to maturity is 3 months?   a) Calculate the price of a call option on this stock? b) Calculate the price of a put option price on this stock? c) Is the put-call parity of these options hold? If possible, please provide a detailed step by...
Your firm's preferred stock pays a dividend of $3.30 per year. The current price of the...
Your firm's preferred stock pays a dividend of $3.30 per year. The current price of the preferred stock is $21.50. Your firm's tax rate is 35%. What is your firm's cost of preferred stock?
You own the stock of Pettersson and its current price is $36.00/share. It pays no dividend...
You own the stock of Pettersson and its current price is $36.00/share. It pays no dividend today. Based on your own research, you expect Pettersson to pay its first dividend of $2.50/share at the end of Years 1, 2, and 3 (12, 24, and 36 months from now). Given its performance outlook, you further expect the Board of Pettersson to increase the Year 4 dividend by 10% to $2.75; and then to increase it further by 4% annually for the...
A stock pays a dividend of $50 at the end of the first year, with each...
A stock pays a dividend of $50 at the end of the first year, with each subsequent annual dividend being 5% greater than the preceding one. Mandy buys the stock at a price to earn effective annual yield of 10%. Immediately after receiving the 10th dividend, Mandy sells the stock for a price of P. Her effective annual yield over the 10-year period was 8%. Calculate P. (Answer $1,275.54)
The current price of a non-dividend-paying stock is $50. Over the next six months it is...
The current price of a non-dividend-paying stock is $50. Over the next six months it is expected to rise to $60 or fall to $48. Assume the risk-free rate is zero. An investor sells call options with a strike price of $55. What is the value of each call option according to the one-step binomial model? Please enter your answer as a number rounded to two decimal places (with no dollar sign).
1. Let’s say that a $50 strike call pays a 2.0% continuous dividend, r = 0.07,...
1. Let’s say that a $50 strike call pays a 2.0% continuous dividend, r = 0.07, σ = 0.25, and the stock price is $48.00. What is the profit or loss, per share, for a short call position if the option expires in 60 days and the price rises to $50.00 after 5 days? Correct Answer= $0.84 loss per share Question- how do we get to this? 2.Assume S = $33.00, σ = 0.32, r = 0.06, div = 0.01....
The current price of a non-dividend paying stock is $50. Use a two-step tree to value...
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European put option on the stock with a strike price of $48 that expires in 6 months. Each step is 3 months, the risk-free rate is 4%, and u = 1.1 and d = 0.9. Please enter your answer rounded to two decimal places (and no dollar sign).
The current price of a non-dividend paying stock is $50. Use a two-step binomial tree to...
The current price of a non-dividend paying stock is $50. Use a two-step binomial tree to value a European call option on the stock with a strike price of $52 that expires in 6 months, so each step is 3 months, the risk free rate is 4% per annum with continuous compounding. What is the option price when u = 1.1 and d = 0.9
The current price of non-dividend paying stock is $50. Use a two-step tree to value an...
The current price of non-dividend paying stock is $50. Use a two-step tree to value an American put option on the stock with a strike price of $52 that expires in 12 months. Each step is 6 months and the continuously compounded risk-free rate is 6% per annum. Calculate the American put option price. Assume that u=1.2 and d=0.8.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT