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Consider a long forward contract to purchase a coupon bond whose current price is $900. The forward contract matures in 9 months. A coupon of
Consider a long forward contract to purchase a coupon bond whose current price is $900. The forward contract matures in 9 months. A coupon of $40 will be paid in 4 months. The 4-month and 9-month risk-free interest rates continuously compounded are 3% and 4% per annum, respectively. Suppose that the forward price is relatively low at $867. Describe the arbitrage opportunity (including actions / timings / cash flows) and calculate the arbitrage profit.
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