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Tim invested in a long position in a forward contract on 100 shares of stock ABC on Sep 1st 2012 with a maturity of 12
Tim invested in a long position in a forward contract on 100 shares of stock ABC on Sep 1st 2012 with a maturity of 12 months (that is, the delivery date of the forward contract is Sep 1st, 2013). The forward price on the contract is $104.08 per share. Stock ABC is not expected to pay any dividend before the maturity of the forward contract. The continuously compounded interest rate is 4% per year. 1. Assume frictionless financial markets.
What is the no arbitrage price of stock ABC on Sep 1st, 2012? Is the forward price higher or lower than the stock price? Why?
Please show work. Thank you.
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