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Consider a long forward contract to purchase a non-dividend paying stock in six months. The current spot price is 62, and the interest rate is

Consider a long forward contract to purchase a non-dividend paying stock in six months. The current spot price is 62, and the interest rate is 4% per annum. You observe a price of 61 on a forward contract that matures in six months.


a)Explain in words why you might think this is an arbitrage strategy and how you can capitalize on it.


b)Produce a statement of cash flows that shows the in-and outflows of cash today and in six months if you were to execute the arbitrage strategy. What is the risk-free gain?

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