Consider a 2-year forward contract on a non-dividend-paying stock. The current stock price is $500. The...

Consider a 2-year forward contract on a non-dividend-paying stock. The current stock
price is $500. The forward price is $520, and the risk-free interest rate is 5% per annum.
Is there an arbitrage? If so, what is the arbitrage profit today? (Consider an arbitrage
strategy where we long or short the forward on one share of the stock and the net cash
flow in year 2 is zero)

Solutions

Expert Solution

Working: -

PLEASE UPVOTE FOR THE SOLUTION

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A forward contract on a non-dividend paying stock trades at 1,200. This forward contract matures 1...

A forward contract on a non-dividend paying stock trades at 1,200. This forward contract matures 1 month from now. A second forward contract on the same stock trades at 1,220 and expires 3 months from now. Suppose perfect market and a continuously compounding interest rate which will remain same over the next 6 months. 1. What is the spot price of the underlying asset today? 2. Now, suppose there is a third forward contract, expiring in 4 months and trading...

A single-stock futures contract on a non-dividend-paying stock with a current price of $120 has a...

A single-stock futures contract on a non-dividend-paying stock with a current price of $120 has a maturity of 1 year. If the T-bill rate is 6%, what should the futures price be? What should the futures price be if the maturity of the contract is 6 years? What should the futures price be if the interest rate is 9% and the maturity of the contract is 6 years?

Consider an option on a non-dividend-paying stock that follows a GBM. The current stock price is...

Consider an option on a non-dividend-paying stock that follows a GBM. The current stock price is $80, the exercise price is $80, the continuously compounded risk-free interest rate is 6% per annua;, the volatility is 30% per annual, and the time to maturity is one year. (a) What is the BSM-price of the option if it is a European call? (b) What is the BSM-price of the option if it is an American call? (c) What is the BSM-price of...

Consider a non-dividend paying stock. Recall that we have found the forward price of a stock supposing that

Consider a non-dividend paying stock. Recall that we have found the forward price of a stock supposing that the market is perfect. In particular, we assumed that the borrowing rate equals the saving rate and that there is no bid-ask spread in trading the stock. Suppose now that the effective borrowing rate is not equal the effective saving rate, in particular, rb(t,T) >rs(t,T). Suppose in addition that the bid price (when you sell or sell short a stock) is lower...

Consider a 1-year forward contract on a stock with a price of $51. The current price...

Consider a 1-year forward contract on a stock with a price of $51. The current price of the stock is $50. A cash dividend payment of $2 per share is anticipated in 9 months. The interest rate is 3% per annum with continuously compounding. Assume that there are no transaction costs. (a) Determine the fair price and the initial value of the forward contract today. (b) Is there any arbitrage opportunity? Verify your trading positions taken at each point in...

Consider a 1-year forward contract on a stock with a price of $51. The current price...

A non-dividend-paying stock is currently worth $61. A forward contract on the stock expires in 0.7...

A non-dividend-paying stock is currently worth $61. A forward contract on the stock expires in 0.7 years. The T-bill rate is 8% (continuously compounded) for all maturities. What is the forward price? What is the value of the forward contract to the long?

A non – dividend – paying stock with a current price of $52, the strike price...

A non – dividend – paying stock with a current price of $52, the strike price is $50, the risk free interest rate is 12% pa, the volatility is 30% pa, and the time to maturity is 3 months? a) Calculate the price of a call option on this stock b) What is the price of a put option price on this stock? c) Is the put-call parity of these options hold? (4 + 4 + 2 = 10 marks)...

Consider the following information for a non-dividend-paying stock: Current stock price = 46.20 Call Price Exercise...

Consider the following information for a non-dividend-paying stock: Current stock price = 46.20 Call Price Exercise Price Put Price 7.03 40 0.83 5.24 42.5 1.54 3.76 45 2.56 2.61 47.5 3.9 a) Calculate the maximum profit of a covered call strategy using nearest out-of-the-money options. b) Calculate the maximum loss of a collar strategy using nearest out-of-the-money options. c) Calculate the value of a butterfly spread that peaks at LaTeX: S_T=45.00S T = 45.00. d) Estimate the maximum value of...

Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock...

Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock price is $50 and the risk-free interest rate is 10% p.a. It is also known that the stock will pay a $3 dividend at the end of year 1. The current settlement price for the futures contract is $51. Set up a strategy for an arbitrage profit. What are the initial and terminal cash flows from the strategy? Assume that investors can short-sell or...

Subjects