Emma and Robert are discussing an investment opportunity about the stock XYZ. The stock has a...

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Emma and Robert are discussing an investment opportunity aboutthe stock XYZ. The stock has a current price of €100 and theforward price for delivery of this stock in 1 year is €110. Theannual effective risk-free interest rate is 5%. This stockcurrently pays no dividends. Read the following discussions aboutthe contract. Do you support them or not? Justify your answers.
i. Emma argues that investing in XYZ stock versus investing inthe forward contract does not provide a comparative advantage.
ii. Robert says that he has read about rumours of a dividend of3.5 to be paid on this stock, 6 months from now. If true, he isarguing that it would be more beneficial to invest in the forwardcontract, rather than investing in the stock.
iii. Emma argues that investing in the forward contract would bemore advantageous than investing in the stock only if the 5%interest rate is not annual effective but continuouslycompounded.

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4.2 Ratings (461 Votes)

Forward Price F FV of stock Price FV of any dividen i Emma argues that investing in XYZ stock versus investing in the forward contract does not provide a comparative advantage This statement is correct Stock price today is nothing but present value of the forward price In a risk neutral world without any arbitrage opportunity Forward Price See Answer

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Emma and Robert are discussing an investment opportunity aboutthe stock XYZ. The stock has a current price of €100 and theforward price for delivery of this stock in 1 year is €110. Theannual effective risk-free interest rate is 5%. This stockcurrently pays no dividends. Read the following discussions aboutthe contract. Do you support them or not? Justify your answers.i. Emma argues that investing in XYZ stock versus investing inthe forward contract does not provide a comparative advantage.ii. Robert says that he has read about rumours of a dividend of3.5 to be paid on this stock, 6 months from now. If true, he isarguing that it would be more beneficial to invest in the forwardcontract, rather than investing in the stock.iii. Emma argues that investing in the forward contract would bemore advantageous than investing in the stock only if the 5%interest rate is not annual effective but continuouslycompounded.