Based on the below passage, shouldn’t the forward price include carry benefits of ZAR1.50 (from dividends), rather than ZAR3.00? I interpreted “an annual dividend of ZAR3.00 on a semiannual basis” as paying ZAR1.50 twice per year. Is this wrong?
The below passage related to #47 of the CFA Mock Exam #1 Afternoon Session:
“Ndlovu is also evaluating the forward contract in Zulu Mineral Mining (Zulu) stock to determine if an arbitrage opportunity exists. The South African 12-month prime rate is 3.25%. The spot price for Zulu is ZAR 60.50. Zulu pays an annual dividend of ZAR3.00 on a semiannual basis , and the next dividend is paid in three months. Interest compounds annually”
The three-month forward price for Zulu stock is closest to: A ZAR63.99. B ZAR59.47. C ZAR57.99.
C is correct. The formula for calculating the forward price (F0[T]), where S denotes the spot market price, γ (gamma) denotes carry benefits such as dividends or interest payments, and θ (theta) denotes carry costs, is: F0(T) = FV0,T(S0 + θ0 – γ0) = FV0,T(S0) + FV0,T(θ0) – FV0,T(γ0) = 60.5(1 + 0.325)3/12 + 0 – 3.00 = ZAR57.99. The dividend received is a carry benefit that decreases the cost of the forward price.