Homework Answers
buy stock at $300
Sell 1 year forward @ $310
Therefore arbitrage profit (at the end of year 1) = $310- $300 = $10
Kindly note that in above problem, we have assumed that even cost of funds (borrowing cost) is zero.
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Suppose the current stock price is $45.34 and the continuously compounded intrest rate is 5% The stock pays a dividend of $1.20 in three months. You observe a 9-month forward contract with forward price $47.56. Is there an arbitrage opportunity on the forward contract? If so describe the strategy to realize a profit and find the arbitrage profit. Answer: $1.7178 W1
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