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Consider a stock that pays no dividends and currently sells for S0. The forward on this...

Consider a stock that pays no dividends and currently sells for S0. The forward on this stock for date-T delivery has the forward price F0 that is greater than S0erT . Suppose that short selling for this stock is NOT allowed in the market. For the forward, we can either long or short. Here, we can make an arbitrage Is this true or false?

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Expert Solution

True. We can borrow money to buy the stock today at S0. We will have to pay back S0exp(rt) at the end of the period. We will also go short on the forward and hence sell the stock later at a price greater than S0exp(rt) hence we will make a profit in this way

jeff jeffy answered 2 years ago
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