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A share currently trades at $10 and will pay a dividend of 50 cents in one month's time. A investor can enter into a forward contract now under which he/she agrees to buy or sell th share in 6 months' time for $9.70, depending on his/her position in the forward contract Assume that an investor can always borrow/lend at a risk-free force of interest of 3% p.a determine whether arbitrage opportunity exists in this scenario. If so, show how an investo can make a risk-free profit with zero initial investment. Assume all months are of equal length

A share currently trades at $10 and will pay a dividend of 50 cents in one month's time. A investor can enter into a forward contract now under which he/she agrees to buy or sell th share in 6 months' time for $9.70, depending on his/her position in the forward contract Assume that an investor can always borrow/lend at a risk-free force of interest of 3% p.a determine whether arbitrage opportunity exists in this scenario. If so, show how an investo can make a risk-free profit with zero initial investment. Assume all months are of equal length

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A share currently trades at $10 and will pay a dividend of 50 cents in one month's time. An investor can enter into a forward contract now under which he/she agrees to buy or sell the share in 6 months' time for $9.70, depending on his/her position in the forward contract. Assume that an investor can always borrow/lend at a risk-free force of interest of 3% p.a., determine whether arbitrage opportunity exists in this scenario. If so, show how an investor can make a risk-free profit with zero initial investment. Assume all months are of equal length.
Transcribed Image Text:A share currently trades at $10 and will pay a dividend of 50 cents in one month's time. An investor can enter into a forward contract now under which he/she agrees to buy or sell the share in 6 months' time for $9.70, depending on his/her position in the forward contract. Assume that an investor can always borrow/lend at a risk-free force of interest of 3% p.a., determine whether arbitrage opportunity exists in this scenario. If so, show how an investor can make a risk-free profit with zero initial investment. Assume all months are of equal length.
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