5. XYZ stock costs $123.118 per share. This stock pays dividends at an annual continuous rate of 2.5%. A 18 month forward has a price of $130.242. You own 1000 shares of XYZ stock. Calculate the annual continuous rate of interest at which you can borrow by shorting your stock. Answer: 6.25% Suppose the current stock price is $45.34 and the continuously compounded intrest rate is 5%. The stock pays a dividend of $1.20 in three months. You observe a 9-month forward contract with forward price $47.56. Is there an arbitrage opportunity on the forward contract? If so, describe the strategy to realize a profit and find the arbitrage profit. Answer: S1.7178 6