Question
3. The share price of a stock is quoted at $43, while a dividend of $1.85 is expected in three months. The risk-free rate is
3. The share price of a stock is quoted at $43, while a dividend of $1.85 is expected in three months. The risk-free rate is 3% per annum with continuous compounding. (a) A certain trader quotes the six-month forward price on the stock at $42. Does an arbitrage opportunity exist? If so, describe in words (no number required) how you can make a risk-free profit form this situation. In your answer be sure to include (i) the name of the arbitrage strategy available in this case, and (ii) the actions you take at various times (i.e., today, in three months, and in six months).
(b) What is the dollar amount of the risk-free profit that can be made per stock using the above arbitrage strategy.
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