There are two stocks A and B.

There are two stocks A and B. They are traded at the same price today: $80 per share. The only difference between these two stocks is: stock A pays a dividend of $1 per share in 6 months and incurs a storage cost of $2 per share in 9 months while stock B does not pay any dividend and incur any storage cost. Consider two 1-year forward contracts, one on stock A and the other on stock B. What is the relation between the no-arbitrage forward prices of these two contracts? Suppose the interest rate is 10% per annum and continuously compounded.

– no-arbitrage forward price on stock A is greater than no-arbitrage forward price on stock B.

– no-arbitrage forward price on stock A is less than no-arbitrage forward price on stock B.

– no-arbitrage forward price on stock A is equal to no-arbitrage forward price on stock B.

– none of above.

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