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    rav222 Posts: 1, Reputation: 1
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    Oct 27, 2011, 10:17 PM
    Dividends and forward price of stock
    Hello, I am preparing for my midterm exam and do not know how to solve these questions:

    3.1 A $ 50 stock pays a dividend of $1 every 3 months, with the rst dividend coming 3
    Months from today. The continuously compounded interest rate is 3%.
    (I) What is the forward price of this stock with expiry 1 year from today? (The forward
    Is to purchase the stock ex-dividend, I.e. The purchaser under the forward does not
    Receive the dividend being paid at expiry.)
    (ii) Suppose you were able to go long or short this forward for a forward price $ 1 less
    Than your answer in part (I). Describe in detail the arbitrage that could be done.

    3.2 Repeat Question 3.1, replacing the stock by a foreign currency, with spot price $ 7.8,
    And which pays interest at 4%, continuously compounded.

    3.4 Take rD = 5% (\domestic" interest rate), rF = 6% (\foreign" interest rate), both
    Continuously compounded. Also take the spot price S of the \foreign dollar" to be 1
    \domestic" dollar.
    (I) What is the no-arbitrage 1 year forward price of the F$ (\foreign dollar"), in D$s
    (\domestic dollars")?
    (ii) If the forward price of the foreign dollar were D$ 0.1 HIGHER than in Part (I),
    Then describe the arbitrage you could implement.
    (iii) The forward price of the foreign dollar were D$ 0.1 LOWER than in Part (I),
    Then describe the arbitrage you could implement.


    THANKS in advance! Urgent help much appreciated!

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