Equity Forward and Futures Contracts
Assume that Tractor Corp. pays one dividend per year of USD 2.50 in the middle of each calendar year. If the initial price is USD 100, and the risk-free rate is 2%, what is the value of the one-year no-arbitrage forward price at the beginning of the year?
Awesome!
Use the equation
$$\displaystyle F_0 = S_0 e^{(r_c + CC - CB)T} $$
Since there are no carry costs, you can remove CC. Since the dividend is paid in the middle of the year, it should be compounded forward to year end:
$$\displaystyle CB = 0.025(1 + 0.02)^{0.5} \approx 0.025249$$
Then fill in the remaining values:
$$\displaystyle F_0 = 100 e^{(0.02 + 0 - 0.025249)^1} \approx 99.48 $$
No.
The dividend needs to be adjusted for the time period.
No.
That's the value of the forward contract if no dividend was paid.
USD 99.45
USD 99.48
USD 102.00
