Methodsof

Buyingan

Asset

How to Buy a Share of Stock

• Outright purchase– Pay S0 at t = 0; receive stock at t = 0

• Borrow to pay for stock– Pay S0•erT at t = T; receive stock at t = 0

• Prepaid forward– Pay F0,TP at t = 0; receive stock at t = T

• Forward– Pay F0,T at t = T; receive stock at t = T

How to Buy a Share of Stock (cont.)

• Note:– For non-div-paying asset: F0,T

P = S0

– For contin div yield: F0,TP = S0•e-T

– For non-div-paying asset: F0,T = S0•erT

– For contin div yield: F0,T = S0•e(r-)T

• Cash-and-carry– Long asset + short forward

• Reverse cash-and-carry– Short asset + long forward

Q: Four Ways to Buy Stock (From Exam FM Fin Econ Sample Questions)

Q: Four Ways to Buy Stock (From Exam FM Fin Econ Sample Questions)