11. Consider the same information from the previous question. The price of a six-months forward contract is $100. What is the potential arbitrage profit? (a) $1.00 (b) $0.00 (c) $0.50 (d) -$0.50

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Answer question 11

10. Recall that the risk-neutral probability of an asset corresponds to the probability for which the
expected return on the asset equals the risk-free rate. Consider a special case where the current
asset value is So = 100, and the annual risk-free rate is r = 0%. The asset does not pay dividends.
Additionally, consider a simple distribution in which the asset price goes up by $10 with probability
p and drops by $10 with probability 1 - p. Based on this information, what is the risk-neutral
probability?
(a) 0.55
(b) 0.50
(c) 0.45
(d) 1.00
11. Consider the same information from the previous question. The price of a six-months forward
contract is $100. What is the potential arbitrage profit?
(a) $1.00
(b) $0.00
(c) $0.50
(d) -$0.50
Transcribed Image Text:10. Recall that the risk-neutral probability of an asset corresponds to the probability for which the expected return on the asset equals the risk-free rate. Consider a special case where the current asset value is So = 100, and the annual risk-free rate is r = 0%. The asset does not pay dividends. Additionally, consider a simple distribution in which the asset price goes up by $10 with probability p and drops by $10 with probability 1 - p. Based on this information, what is the risk-neutral probability? (a) 0.55 (b) 0.50 (c) 0.45 (d) 1.00 11. Consider the same information from the previous question. The price of a six-months forward contract is $100. What is the potential arbitrage profit? (a) $1.00 (b) $0.00 (c) $0.50 (d) -$0.50
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