Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%.
(a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55.
(b) Is there any advantage to investing in the stock or the forward contract? Why?
(c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same.
Now is there any advantage to investing in the stock or the forward contract?