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The current price for stocks A and B is RM300, and the annual continuously compounded risk-free interest rate is 4%. Stock A: Dividends will be
The current price for stocks A and B is RM300, and the annual continuously compounded risk-free interest rate is 4%. Stock A: Dividends will be paid every year for the next 20 years, with the first dividend occurring one year from now. The amount of the first dividend is RM1.70, but each subsequent dividend has an increment of RM0.10 for the first ten years and remains constant after that. Stock B: Dividends will be paid every year for the next 20 years, with the first dividend occurring one year from now. The amount of the first dividend is RM1.60, but each subsequent dividend will be 1.5% higher than the previous paid. Let X be the fair price of a 20-years prepaid forward contract on stock A and Y be the fair price of a 20-years prepaid forward contract on stock B. Determine X+Y. (12 marks)
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