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A stock is expected to pay a dividend of $2 per share in 2 months and in 5 months. An investor purchased a forward contract
A stock is expected to pay a dividend of $2 per share in 2 months and in 5 months. An investor purchased a forward contract on the stock at a forward price of $100 some time ago. The contract now has 6 months to its delivery date. The stock is currently trading at $110 and the risk free rate is 4% on a continuously compounded basis. Consider the following statements. I. The price of a new forward contract on the stock with 6 months to the delivery date should be close to $108.16. II. The value of the investor's forward position is $6.99. III. If the price of a forward contract on the stock with 6 months to the delivery date is $112.00, an investor could sell the forward contract, buy the stock, and make an arbitrage profit of close to $3.81 on the delivery date. Which of the following is correct? a. Statements I, II and Ill are correct. b. Statement is incorrect, Statements II and III are correct. O c. Statement II is incorrect, Statement I and III are correct
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