a. What are the cash flows now and in one year? (Hint: Remember to account for the dividend.) 0, FO + ST -SO, ST + D 0, FO - ST So, -So(1+r) Oo, Fo +D S (1 + r) b. Show that the equilibrium futures price must be Fo FO F = = So (1 + r) So (1r) + D Fo= = So (1+r) + D Fo= = So (1 r) D FO So (1+r) D = - So (1+r) D to avoid arbitrage. = D/So, and conclude that Fo = So (1+rd). c. Call the dividend yield d FO FO F F = = = = 50 (1 - r - d) So (1 + r- d) 50 (1 - rx d) 50 (1 - r + d) FO = So (1+r+ d)