For explanations, reach out to whatsapp +1 (213) 772-0059
Suppose that the risk-free interest rate is 10% per annum with continuous compounding. The
dividend yield on a stock is 6.5% per annum (q=6.5%). The stock currently is selling at $260
and the futures price for a contract deliverable in four months is $266.
a. What is the forward price predicted by the formula F0 = S0 e(r-q)T? Blank 1 (sample
answer: 130.50)
b. Is there an arbitrage opportunity? Blank 2 (sample answer: yes; or no)
c. If there is an arbitrage opportunity, then will you long futures or short futures? Blank
3(sample answer: Long; or Short)
d. What is the arbitrage profit per share if there is an arbitrage opportunity in today’s dollar (PV
of the profit) ignoring the transaction fee? Blank 4(sample answer: 1.25)
Answers
A. 263.05 B. Yes C. Short D. 2.85
For explanations, reach out to whatsapp +1 (213) 772-0059
Suppose that the risk-free interest rate is 10% per annum with continuous compounding. The
dividend yield on a stock is 6.5% per annum (q=6.5%). The stock currently is selling at $260
and the futures price for a contract deliverable in four months is $266.
a. What is the forward price predicted by the formula F0 = S0 e(r-q)T? Blank 1 (sample
answer: 130.50)
b. Is there an arbitrage opportunity? Blank 2 (sample answer: yes; or no)
c. If there is an arbitrage opportunity, then will you long futures or short futures? Blank
3(sample answer: Long; or Short)
d. What is the arbitrage profit per share if there is an arbitrage opportunity in today’s dollar (PV
of the profit) ignoring the transaction fee? Blank 4(sample answer: 1.25)
Answers
A. 263.05 B. Yes C. Short D. 2.85
For explanations, reach out to whatsapp +1 (213) 772-0059
