Question
In real-life borrowing rates are higher than lending rates. Suppose that you can borrow at r = 6% but can only invest at r =
In real-life borrowing rates are higher than lending rates. Suppose that you can borrow at r = 6% but can only invest at r = 2%. Both rates are annualized, continuously compounded.
Given that S0 = 50 and the asset pays continuous dividends of = 4%, derive the range of 2-year forward prices on this asset that are consistent with no-arbitrage. Use cash-and-carry strategies to justify your answer.
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Foundations of Finance The Logic and Practice of Financial Management
Authors: Arthur J. Keown, John D. Martin, J. William Petty
8th edition
132994879, 978-0132994873
