(a) The price of a European put on XYZ stock that matures in six months and has a strike price of £60 is £10. XYZ is currently priced at £65 per share, and is sure to pay a £10 dividend in three months. The continuously compounded risk-free rate is 8% per year for all maturities. What is the price of a European call on XYZ stock with the same maturity (six months) and strike (£60)? Show in detail how you would create an arbitrage if the call price were in fact £1 less than the theoretical price. (b) What can you conclude about the call price in part (a) if the stock cannot be sold short either in the spot nor in the forward markets?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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