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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
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