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Postby bhuyanpk » Mon Sep 21, 2015 2:41 am

A person has entered into a 150-day forward contract on a stock at $80 and there is an
expected dividend on the stock of $2.5 payable in 90 days. After 30 days the stock price has
moved to $86. What is the value of this forward contract given risk free rate of 5%.
Solution: The dividend payable has 60 days left before the stock becomes ex-dividend from the
current date and the contract will mature in 120 days.
= 2.48
Value of the contract = (86-2.48) – {80/(1.05)120/365 }
= $ 4.79

I did not understand why are we calculating PV of 30 days for dividend.Is that due to stock price changed after 30 days?pls explain


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Re: Derivatives-I

Postby edupristine » Mon Sep 21, 2015 10:50 am

PVD = 2.5/{(1.05)^(30/365)} = 2.48
Present value is calculated on 30 days because Stock price will move with dividend only till the time stock becomes ex-dividend. After the ex-dividend date, stock price move without the dividend. When the stock price reaches the ex-dividend date, stock price falls by the dividend price i.e PV of 2.5. So, securities bought and sold no longer come attached with the right to receive the most recently declared dividend.

Value of the contract= (86-2.48) – {80/(1.05)^(120/365)}
= $4.79

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