Given the following information, Spot =R100 Risk free = 10% Maturity = 1 year Forward contract...

Given the following information, Spot =R100 Risk free = 10% Maturity = 1 year Forward contract price =R80 Which arbitrage opportunity will you use to exploit the mispricing?

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Expert Solution

Expected forward price = Spot * e^(rf*t)

= 100 *e^(0.10*1) = 110.52

Given Forward Price = 80

Since given price is lower than expected price.

We will sell the contract at spot price and but it back at given forward price.

jeff jeffy answered 2 years ago

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