Suppose that the risk-free interest rate is 12% per annum with continuous compounding and a stock that pays 1 dollar dividend in 3, 6 and 9 months time. The current stock price is $40, and the futures price for a contract deliverable in 11 months is $45. a) What is the theoretical future prices? B) what arbitrage opportunities does this create (shoe arbitrage strategies with cash flows) C) Why does the position of a short hedger become more advantageous when the basis strengthens unexpectedly, but less advantageous when the basis weakens unexpectedly?

Suppose that the risk-free interest rate is 12% per annum with continuous compounding and a stock that pays 1 dollar dividend in 3,6 and 9 months time. The current stock price is $40, and the futures price for a contract deliverable in 11 months is $45. a) What is the theoretical future prices? B) what arbitrage opportunities does this create (shoe arbitrage strategies with cash flows) C) Why does the position of a short hedger become more advantageous when the basis strengthens unexpectedly, but less advantageous when the basis weakens unexpectedly