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    Chag PDF

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    Shehry Vibes
    The document discusses a dividend payment problem involving the Fashion Exports Group stock. [1] If the record date for the dividend payment is tomorrow, the ex-dividend date would be today since the settlement period in the Australian Securities Exchange (ASX) is T+2. [2] There is an opportunity for arbitrage profits since the AUD/USD exchange rates in New York and Sydney are different. [3] An arbitrage scheme is proposed where the company converts AUD to USD in New York at a higher rate and then converts back to AUD in Sydney at a lower rate, gaining a potential profit of AUD 7,900.06.

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    Chag PDF

    Uploaded by

    Shehry Vibes
    103 views5 pages
    The document discusses a dividend payment problem involving the Fashion Exports Group stock. [1] If the record date for the dividend payment is tomorrow, the ex-dividend date would be today since the settlement period in the Australian Securities Exchange (ASX) is T+2. [2] There is an opportunity for arbitrage profits since the AUD/USD exchange rates in New York and Sydney are different. [3] An arbitrage scheme is proposed where the company converts AUD to USD in New York at a higher rate and then converts back to AUD in Sydney at a lower rate, gaining a potential profit of AUD 7,900.06.

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    The document discusses a dividend payment problem involving the Fashion Exports Group stock. [1] If the record date for the dividend payment is tomorrow, the ex-dividend date would be today since the settlement period in the Australian Securities Exchange (ASX) is T+2. [2] There is an opportunity for arbitrage profits since the AUD/USD exchange rates in New York and Sydney are different. [3] An arbitrage scheme is proposed where the company converts AUD to USD in New York at a higher rate and then converts back to AUD in Sydney at a lower rate, gaining a potential profit of AUD 7,900.06.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    103 views5 pages

    Chag PDF

    Uploaded by

    Shehry Vibes
    The document discusses a dividend payment problem involving the Fashion Exports Group stock. [1] If the record date for the dividend payment is tomorrow, the ex-dividend date would be today since the settlement period in the Australian Securities Exchange (ASX) is T+2. [2] There is an opportunity for arbitrage profits since the AUD/USD exchange rates in New York and Sydney are different. [3] An arbitrage scheme is proposed where the company converts AUD to USD in New York at a higher rate and then converts back to AUD in Sydney at a lower rate, gaining a potential profit of AUD 7,900.06.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    https://www.chegg.

    com/homework-help/questions-and-answers/assume-working-fashion-
    exports-group-corporation-going-pay-annual-dividend-7-per-share-ext-q108967494?trackid=
    6b8e3ea92844&strackid=b34d8e674ed8

    Question
    Assume that you are working for Fashion Exports Group. Your corporation is going to pay an
    annual dividend of $7 per share and an extra dividend of $1.5 per share in 4 weeks. The
    company’s stock is currently listed and actively traded on ASX.

    Required:

    a. The standard process of settlement in ASX is T+2. If tomorrow is the record date for
    dividend payment for Fashion Exports Group, when is the ex-dividend date for trading this
    share on ASX?

    b. Calculate the ex-dividend price if the corporation’s closing price the day before the ex-
    dividend date is $112.5, assuming the dividend flat tax rate is 15%.

       c. Fashion Exports Group has an extra cash of AUD 785,000. The AUD/USD exchange rate
    in New York is 0.73659. The USD/AUD rate in Sydney is 1.37127.

                 i. Is there a possibility for an arbitrage profit?

               ii.  Set up an arbitrage scheme with the extra cash.

               iii.  What is the potential gain in the AUD dollar, disregarding the bid-ask spread?     

    Answer
    1 General guidance
    The answer provided below has been developed in a clear step by step manner.

    2 Step By Step

    Step 1
    Several questions appear on the screen. In the first question, the ex dividend date and price
    are to be determined. In the second question, an arbitrage strategy has to be proposed.

    There are four dates that are relevant in dividend payment process:

    1. Declaration Date: date on which the corporation: Declares a specific dividend and its
    Board approves in board meeting.

    2. Ex-Dividend Date: first day when the share trades without the dividend value (share price
    falls generally). Any investor who buys shares on or after this date does not get the dividend

    3. Holder of Record Date: The date on which the shareholder listed on the corporation’s
    records will deemed to have ownership.

    4. Payment Date: date on which the dividends are actually paid out

    EXPLANATION

    As such, it is really the ex-dividend date rather than the date of record that is used to
    determine who the recipients of the dividend will be. As a result of this determination,
    generally on the ex-dividend date, the price of a share of the company’s stock falls by
    the amount of the dividend adjusted for the taxes.

    Explanation
    Please refer to solution in this step.

    Step 2
    Record date: tomorrow

    Settlement process: T + 2.
    Hence, the ex-dividend date will be : tomorrow - (2 - 1) = tomorrow - 2 + 1 = Today.

    Hence, the ex-dividend date will be today.

    EXPLANATION

    Since the settlement process is T + 2, all trades executed until yesterday, will be
    settled by tomorrow and the new buyers will have their names updated in the record,
    by tomorrow and will be eligible for dividend. All trades executed thereafter, will not
    entitle the new buyer for dividend. Hence, the share will trade with dividend until
    yesterday, and it will go ex-dividend today.

    Explanation
    Please refer to solution in this step.

    Step 3

    Hence, the ex dividend price = 103.15

    EXPLANATION
    The share price will fall to the extent of post tax dividend amount, i.e. total dividend - total
    tax on dividend = total dividend x (1 - tax rate)..

    Explanation
    Please refer to solution in this step.

    Step 4
    Question (b)
    Since the actual USD/AUD rate is not equal to no arbitrage USD/AUD rate, there is indeed an
    arbitrage opportunity.

    EXPLANATION
    Since the actual USD/AUD rate is not equal to no arbitrage USD/AUD rate, an arbitrageur can
    sell one currency and purchase it back to make a profit.

    Explanation
    Please refer to solution in this step.

    Step 5
    Question c(i)

    Arbitrage scheme:

    Amount for arbitrage in AUD, A = 785,000

    1. Sell AUD to get USD at current AUD/USD rate, in New York.


    EXPLANATION

    Thus it is possible to make an arbitrage profit of AUD 7,900.06 just by buying and
    selling AUD in two different countries.

    Explanation
    Please refer to solution in this step.

    Step 6
    Ex dividend date: Today

    Ex dividend price: 103.15

    Question (b)

    Yes, there is an arbitrage possibility.

    Question c(i)

    Sell AUD in New York. Buy AUD in Sydney.

    Potential gain = AUD 7,900.06

    Explanation
    Please refer to solution in this step.

    3 Answer
    I hope my answer helps you better Please post in comment if any need of further
    explanation or query . I will edit my answer and explain you in better way and Please up-vote
    this answer. Your upvote is so valuable and very precious to me. Please consider my
    request and efforts. Thank you in advance

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