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Forwards in presence ofbid-offer spreads 1. Let S, be the current price of a stock that pays no dividends (a) Let rBID be the interest
Forwards in presence ofbid-offer spreads 1. Let S, be the current price of a stock that pays no dividends (a) Let rBID be the interest rate at which one can invest/lend money, and ropf be the interest rate at which one can borrow money, TBID rofF. Both rates are continu ously compounded. Using arbitrage arguments, find upper and lower bounds for the forward price of the stock for a forward contract with maturity T > t (b) How does your answer change if the stock itself has bid price S4BID and offer price S4OFF
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