You are given: The current stock price is $85. The continuous rate of interest is 5%,...

You are given: The current stock price is $85. The continuous rate of interest is 5%, T=0.5, and the annualized forward premium is 2%.

(a)Find the prepaid forward price.

(b) Tom observes a 6-month forward price of $86.5 in the market. He constructs a portfolio by taking a short position in a forward contract to sell one unit of the stock and buying one unit of the stock. Determine whether Tom’s portfolio is an arbitrage portfolio or not.

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ekkarill92 answered 1 year ago

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