Question

B) Assume that the risk-free interest rate is 9% per annum and that the dividend yield on a stock index varies throughout the year. In February, May, August, and November, dividends are paid at a rate of 5% per annum. In other months, dividends are paid at a rate of 2% per annum. On July 31(ex-dividend), the value of the index is 1,300. What should be the forward price for delivery on December 31(ex-dividend) of the same year? Annualized dividend should be converted to monthly: For example, in February, monthly dividend is 5% divided by 12 and in January, monthly dividend is 2% divided by 12.

Answer 1

Ex-dividend Value of a month = Previous Month Value * (1 + Net Interest rate Per Month)

Value of index on Dec 31 (Ex-Dividend) = $1331.72