Equity forwards and ex dividend date

CFA Level II
#1

lets say there are 2 scenarios.

  1. You buy the forward contract that expires in 1 year that is 1 day before the ex dividend date.

  2. You buy the forward contract that expires in 1 year that is 1 day after the ex dividend date.

———————

Spot price is 100. Risk free rate is 5%. So value of 1 year forward (excluding effects of dividend) is 105.

Do do you subtract the value of the dividend in both situations to get the value of the forward?

#2

You subtract out all dividends that were paid to the stock holder. In both situations 1 & 2, it appears there was 4 dividends paid (assuming quarterly dividend).

#3

No. Only 1 yearly dividend.

#4

Thats why I said assuming 4… If its one, then its 1.

#5

in scenario 1 though, you are due the dividend with the forward contract because you buy the stock with the forward and then get paid the dividend.

but in scenario 2, you are not due the dividend because you buy the stock with the forward contract after the dividend gets paid.

#6

You are confused!!

#7

help me!

#8

Forward contract holder in scenario 1 has right to receive dividend. But in scenario 2 they do not.

How does that effect valuation?