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Given the following information, Spot =$100 Risk free = 10% Maturity = 1 year Forward contract...

Given the following information,
Spot =$100
Risk free = 10%
Maturity = 1 year
Forward contract price =$80
Which arbitrage opportunity will you use to exploit the mispricing?

Solutions

Expert Solution

The forward contract price = Spot * (1 + r)^n

The forward contract price = 100 * (1 + 0.10)^1

The forward contract price = 100 * 1.1

The forward contract price = $110

But, it is quoting at $80. Clearly, the forward contract is underpriced in the market. So, we buy the forward contract at $80 and simultaneously short sell the asset at the spot price of $1000.

jeff jeffy answered 2 years ago
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