1. A stock is currently traded at $60 per share. For this stock, a dividend of $6 per share will be paid in 6 months. The 6-month interest rate is 4% per annum and the 10- month interest rate is 5% per annum. These two interest rates are continuously compounded. We consider a 10-month forward contract (i.e. this contract matures in 10 months) on this stock.

1) What should be the no-arbitrage forward price for this 10-month forward contract?

2) Suppose the forward price for this 10-month forward contract is $61, is there any arbitrage opportunity?

3) If you draw the cash flow table as we did in class to implement your arbitrage strategy, what is the total cash flow (or total gain) you get at maturity of the contract (10 months from now)?

2.A stock is currently traded at $60 per share. For this stock, a dividend of $6 per share will be paid in 6 months. The 6-month interest rate is 4% per annum and the 10-month interest rate is 5% per annum. These two interest rates are continuously compounded. We consider a 10-month forward contract (i.e. this contract matures in 10 months) on this stock.

1) What should be the no-arbitrage forward price for this 10-month forward contract? a. Lower than $49 b. Between $49 and $51 c. Between $51 and $53 d. Between $53 and $55 e. Higher than $55

2) Suppose the forward price for this 10-month forward contract is $61, is there any arbitrage opportunity? a. There is no arbitrage opportunity. b. There is arbitrage opportunity; do cash and carry. c. There is arbitrage opportunity; do reverse cash and carry.

3) If you draw the cash flow table as we did in class to implement your arbitrage strategy, what is the total cash flow (or total gain) you get at maturity of the contract (10 months from now)? a. Lower than $3 FINA 471 Liang Ma b. Between $3 and $4 c. Between $4 and $5 d. Between $5 and $6 e. Higher than $6