Problem 2 Suppose you are interested in futures contract of a stock which pays dividends continuously at a dividend yield of 5% per year. The stock is currently selling at $30, and each futures contract is on 50 shares of stock. Moreover, the annual interest rate is 10% compounded annually. If you observe that the futures price with delivery date 1 year from now is $32 (per share of stock), is there arbitrage opportunity? If there is, construct a strategy to earn risk-free profit.
Problem 2 Suppose you are interested in futures contract of a stock which pays dividends continuously at a dividend yield of 5% per year. The stock is currently selling at $30, and each futures contract is on 50 shares of stock. Moreover, the annual interest rate is 10% compounded annually. If you observe that the futures price with delivery date 1 year from now is $32 (per share of stock), is there arbitrage opportunity? If there is, construct a strategy to earn risk-free profit.
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
Problem 1PS
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Transcribed Image Text:Problem 2 Suppose you are interested in futures contract of a stock which pays dividends
continuously at a dividend yield of 5% per year. The stock is currently selling at $30, and
each futures contract is on 50 shares of stock. Moreover, the annual interest rate is 10%
compounded annually. If you observe that the futures price with delivery date 1 year from
now is $32 (per share of stock), is there arbitrage opportunity? If there is, construct a
strategy to earn risk-free profit.
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