As rate is continuously compounding we will use > e = exponential value = 2.718281828
.
Present value of dividend = Dividend x e^(-5% x 3/12)
PV of dividend = 1.20 x 2.718281828^(-5% x 3/12) = $1.185093361
.
Now,
Forward price calculated = (Stock price - PV of Dividend) x e^(5% x 9/12)
= (45.34 - 1.185093361) x 2.718281828^(5% x 9/12)
= $45.8421538
.
Given Forward price = $47.56 ; hence, forward is selling at higher rate than calculated forward.
Arbitrage opportunity = Given price - Forward price calculated
Arbitrage opportunity = $47.56 - $45.8421538
Arbitrage opportunity = $1.7178
.
Strategy: sell forward contract
Suppose the current stock price is $45.34 and the continuously compounded intrest rate is 5% The...
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