Consider a forward contract on IBM requiring purchase of a share of IBM stock for $150 in

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Consider a forward contract on IBM requiring purchase of a share of IBM stock for $150 in six months. The stock currently sells for $140 a share.

Assume that it pays no dividends over the coming six months. Six-month zero-coupon bonds are selling for $98 per $100 of face value.

a. If the forward is selling for $10.75, is there an arbitrage opportunity? If so, describe exactly how you could take advantage of it.

b. Assume that three months from now: (i) the stock price has risen to $160 and (ii) three-month zerocoupon bonds are selling for $99. How much has the fair market value of your forward contract changed over the three months that have elapsed?

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Financial Markets And Corporate Strategy

ISBN: 9780077119027

1st Edition

Authors: David Hillier, Mark Grinblatt, Sheridan Titman

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