Can someone explain me, why I am not correct here? My thinking: If the stock pays dividend today it has fallen in price long time ago -> we shouldn’t subtract the div… But I am wriong… ------------ Jim Trent, CFA has been asked to price a three month forward contract on 10,000 shares of Global Industries stock. The stock is currently trading at $58 and will pay a dividend of $2 today. If the effective annual risk-free rate is 6 percent, what price should the forward contract have? Assume the stock price will change value after the dividend is paid. A) $56.85. B) $58.85. C) $56.82. D) $56.83. Your answer: B was incorrect. The correct answer was C) $56.82. One method is to subtract the future value of the dividend from the future value of the asset calculated at the risk free rate (i.e. the no-arbitrage forward price with no dividend). FP = 58(1.06)1/4 – 2(1.06)1/4 = $56.82 This is equivalent to subtracting the present value of the dividend from the current price of the asset and then calculating the no-arbitrage forward price based on that value.
Looks good to me. What’s the problem?
It’s wording. If you think as ‘pays dividend today’ as the pay-date then you’re right and you shouldn’t subtract. Here they mean that it goes ex today and thus their calculation is correct. I do understand where you’re coming from, though.
ok - thanks I thought I was getting crazy…