Question
Consider a single-stock futures contract on Best Buy Co. The company will pay a quarterly dividend of $0.17 per share prior to expiration of the
Consider a single-stock futures contract on Best Buy Co. The company will pay a quarterly dividend of $0.17 per share prior to expiration of the futures contract. Consider the following scenario.
- The stock goes ex-dividend in one month; for convenience, we will assume that the dividend is paid at that time. Assume that this dividend is the only one prior to expiration of the futures contract.
- Annualized, continuously compounded risk-free interest rates: r1 = 3% for one month, and r2 = 4% for four months.
- Current spot price of Best Buy stock: $23 per share.
- Contract expiration: T = four months (1/3 of a year).
- Futures price on Best Buy single-stock futures: $25 per share.
Does a risk-free arbitrage opportunity exist? If so, describe the general strategy.
Group of answer choices
A. Sell shares of Best Buy short, invest at the risk-free rates, and enter a long position in Best Buy single-stock futures.
B. Sell shares of Best Buy short, invest at the risk-free rates, and enter a short position in Best Buy single-stock futures.
C. No arbitrage opportunity exists.
D. Borrow at the risk-free rates, buy shares of Best Buy, and enter a long position in Best Buy single-stock futures.
E. Borrow at the risk-free rates, buy shares of Best Buy, and enter a short position in Best Buy single-stock futures.
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