A stock is expected to pay a dividend of €1.5 per share in 2 and 5 months. The stock price
currently stands at €100. The continuously compounded risk-free rate is 4% per annum.
1) What should be the futures price for a 7-month contract?
2) Suppose the futures price quotes €101. Does this create arbitrage opportunities? If there
are, how can we exploit them?
3) Same question if the futures price quotes €98.
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Consider a forward contract to purchase a non-dividend-paying stock in 6 months. Assume the current stock price is $34 and the continuously compounded risk-free interest rate is 6.5% per annum. a. Explain the arbitrage opportunities if the forward price is $37 in the market. b. Explain the arbitrage opportunities if the forward price is $33 in the market.
3. Suppose that the risk-free interest rate is 6% per annum dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitroge opportunities does this create? with continuous compounding and that the
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