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Consider a 1-year forward contract on the IBM stock. Currently the stock is trading at $150 per share on the NYSE. The stock is expected
Consider a 1-year forward contract on the IBM stock. Currently the stock is trading at $150 per share on the NYSE. The stock is expected to pay a cash dividend of $5 per share in six months. The continuously compounded interest rates are 5% for six months and 6% for 12 months.
(1) Calculate the fair price of the 1-year forward contract on the stock.
(2) If the actual forward is quoted at $152, can you identify an arbitrage opportunity? If yes, please complete all necessary transactions to realize the profit.
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