Company Z operates a tour agency and its stock is quoted on the London Stock Exchange at 502.00 pence. The board of directors is not expected to pay dividends over the next 6 months due to poor business conditions. The annual interest rate is currently 2 percent. However, this is expected to rise to 3 percent with the impending rise in inflation. Assume continuous compounding.

 

(i) Calculate the equilibrium six-month forward price (based on the current quoted price and the no-arbitrage approach.

 

(ii) If the interest rate immediately rises as expected, how much would the six-month forward price change ?

 

(iii) If this stock starts paying a dividend, how would this impact the price? Describe and justify your answer.