Consider a 10-month forward contract on 100 shares of stock when the stock price is $50. We assume that the risk-free interest rate continuously compounded is 8% per annum for all maturities. We also assume that dividends of $0.75 per share are expected after three months, six months, and nine months. What should be the equilibrium forward price now? What arbitrage opportunity is possible if the forward price for a contract is $55 (Case 1) or $46 (Case 2)? Show your works for both cases.

Compute I_PV and F_0^*

first. I_PV= F_0^*=

Arbitrage Case 1: F_0=$55>F_0^*=$51.14

Today: long spot & short forward

Before & at maturity:

Arbitrage Case 2: F_0=$46

Today: short spot & long forward

Before & at maturity: