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Opportunities for arbitrage gains

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Financial assets usually cost nothing to store, however, the very purpose of e.g. shares to pay dividends. If you lend a share, the dividend goes to the holder of the share at the time of the dividend, and of course the owner of the share wants to be compensated for this. Assume that shares in the company AB cost SEK 280 on the spot market today and that the share is also traded on a semester in 1 year. The forward price is calculated with the risk-free annual interest rate of 2.5%. Furthermore, the company is planning a share dividend of SEK 21 per share in 1 year just before the forward contract enters into force. What should the forward price of the share be in one year if there are no opportunities for arbitrage gains? The cost of the actual storage when borrowing the share is equal to zero, but the owner is compensated for his missed share dividend.

Reference no: EM133079315

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