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Price of a One year Forward Contract on Stock MCQ
Question
XYZ is a stock currently priced at $100. It is anticipated that XYZ will pay a special dividend of $5.25 in 1 year. Assume further that the annual effective interest rate is 5% (i.e., $100 loaned today will return $105 one year from now). What is closest to the price of a one year forward contract, if we assume that the contract entails delivery of the asset immediately AFTER the dividend is paid (so that the buyer of the forward will not receive the dividend)?
(a) $90
(b) $95
(c) $100
(d) $105
(e) $110
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