Given the above example.

JPMs stock currently sells for 2020.00 and pays no dividend. The risk free rate is 6% and the 1year Futures on the stock is being offered in the market at 2030. Is there a market mispricing? If so, show the details of the trade to capture the arbitrage opportunity. Show the payoffs in year 1 if the stock is up 50% or down 50%.

Q11) JPM's stock currently sells for 100.00 and pays no dividend. The risk free rate is 6% and the 1 year Futures on the stock is being offered in the market at 110. Is there a market mispricing? If so, show the details of the trade to capture the arbitrage opportunity. Show the payoffs in year 1 if the stock is up 50% or down 50%. A11) The fair value of the futures contract is F* = Soe't at time T assuming no dividends. Given a risk free rate of 6% and 1 year to maturity F* = Soert = 100e0.06x1 = 106.1837. If the market is pricing this contact at 110.00 then there is an arbitrage opportunity to sell the overpriced security (in this case the futures contact) and hedge it. Using none of your own capital you can capture the mispricing as follows: Cash Flows at Various Stock Levels Cash Flow Time 0 50 150 Sell Futures Contract 0 110.00 - 50 110.00 - 150 Buy Stock Borrow Proceeds @ e0.06x1 Total -100 +100 0 50 -106.1837 +3.8163 150 -106.1837 +3.8163 This demonstrates that you captured the mispricing regardless of stock volatility