For Stock S and Stock R, you are given: i. The current price of Stock S is 50. S

Question

For Stock S and Stock R, you are given:

i. The current price of Stock S is 50. Stock S pays dividends continuously at a rate proportional to its price. The dividend yield is 2%.

ii. The current price of Stock R is 40. Stock R pays a dividend of $ X in 3 months and another dividend of $ 2X in 6 months.

iii. A European option gives its owner the right to exchange a share of Stock S for two shares of Stock R at the end of 9 months. The value of this option is $35.

iv. A European option gives its owner the right to exchange two shares of Stock R for a share of Stock S at the end of 9 months. The value of this option is $8.96.

v. The continuously compounded risk-free interest rate is 9%.


Calculate X

Explanation / Answer

1. calculation of dividend

Price of Stock S is 50

Dividend yield is 2%

So dividend = $2.00 / $50 = 4%.

So if you buy shares today at $50 per share, you will earn 4% per year from dividends.

2.

Price of Stock S is 40

Dividend yield is 2%

So dividend = $2.00 / $40 = 5%.

Dividend for 3re month = $40*5%*3/12= .50.

Dividend for 6th month = 2*.50 = 1.00.

X= .50, 1.0,

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