A stock will pay a dividend of $1 in one month and $2 in four months....

A stock will pay a dividend of $1 in one month and $2 in four months. The relevant risk-free rate of interest based on continuous compounding is 12%. The current price of the stock is $90.

Determine the arbitrage-free price of (i) a 3 month forward on a contract and (ii) a six-month forward contract on the stock
Suppose the six-month forward is quoted at $100. Identify any arbitrage opportunity and explain what trades you would make to capture it. If applicable, determine the present value of any profit you would earn.

Expert Solution

jeff jeffy answered 2 years ago

A stock is expected to pay a dividend of $2 per share in three months. The...

A stock is expected to pay a dividend of $2 per share in three months. The share price is $75, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a long position in a six-month forward contract on a share of stock. a) What are the forward price and the initial value of the forward contract? b) Three months later, immediately after the payment of the dividend, the...

A stock is expected to pay a dividend of €2 per share in 9 months. The...

A stock is expected to pay a dividend of €2 per share in 9 months. The stock price is €20, and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. An investor has just taken a long position in a 12-month forward contract on the stock. What is the Forward price (K)?

A stock is expected to pay a dividend of $0.70 per share in one month, in...

A stock is expected to pay a dividend of $0.70 per share in one month, in four months and in seven months. The stock price is $30, and the risk-free rate of interest is 7% per annum with continuous compounding for all maturities. You have just taken a short position in an eight-month forward contract on the stock. Six months later, the price of the stock has become $34 and the risk-free rate of interest is still 7% per annum....

A stock is expected to pay a dividend of $1 per share in two months and...

A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. Required What are the forward price and the initial value of the forward contract? Three months later, the price of the stock is $48...

A stock is expected to pay a dividend of$1 per share in 3-month and in 9-month....

A stock is expected to pay a dividend of$1 per share in 3-month and in 9-month. The stock price is$80. An investor has just taken a long position in a 12-month futures contract on the stock. The zero ratesfor 3-, 6-, 9-, 12-month are 5%, 5.5%, 6% and 6.5% per annum with continuous compounding, respectively.6-month later, the stock price is$82. The zero rates happen to be the implied forward rates 6-month ago.What is the value of the long position in...

(A) ATX stock is expected to pay dividend of AUD 1 per share in three months...

(A) ATX stock is expected to pay dividend of AUD 1 per share in three months and AUD 1.50 per share in five months. The ATX stock price is AUD 55 and the risk-free interest is 8% per annum with continuous compounding for all maturities and Mr. Brown has taken a short position in a six-month forward contract. (i) What is the initial value of the forward contract? (ii) What is the forward price of this forward contract (B) Three...

A stock is expected to pay a dividend of $1.25 per share in two months and...

A stock is expected to pay a dividend of $1.25 per share in two months and in five months. The stock price is $127, and the risk-free rate of interest is 5% p.a. with continuous compounding for all maturities. An investor has just taken a long position in a six-month forward contract on the stock. a) What are the forward price and the initial value of the forward contract? b) Three months later, the price of the stock is $135...

A stock is expected to pay a dividend of $1.50 per share in three months and...

A stock is expected to pay a dividend of $1.50 per share in three months and in six months. The stock price is $60, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a nine-month forward contract on the stock. What are the forward price and the initial value of the forward contract? Three months later, the price of the stock is $55 and...

A stock is expected to pay a dividend of $1.5 per share in three months and...

A stock is expected to pay a dividend of $1.5 per share in three months and in six months. The stock price is $80, and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. An investor has just taken a long position in a eight-month forward contract on the stock. (a) What are the forward price and the initial value of the forward contract? (b) Four months later, the price of the stock is...

A stock is expected to pay a dividend of $0.80 per share in two months, in...

A stock is expected to pay a dividend of $0.80 per share in two months, in five months and in eight months. The stock price is $35, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. You have just taken a long position in a nine-month forward contract on the stock. Seven months later, the price of the stock has become $38 and the risk-free rate of interest is still 8% per annum....

Question