Stock Y is currently priced at $25/share and pays dividends continuously at a rate proportional to its price at a constant rate of 3%. An investor short sells 500 shares of the stock and repays dividends by borrowing extra shares of stock Y. After two months the investor closes out all positions when the stock is priced at $24/share. The continuously compounded risk-free interest rate is 5%. Calculate the two-month profit.
Stock Y is currently priced at $25/share and pays dividends continuously at a rate proportional to its price at a constant rate of 3%. An investor short sells 500 shares of the stock and repays dividends by borrowing extra shares of stock Y. After two months the investor closes out all positions when the stock is priced at $24/share. The continuously compounded risk-free interest rate is 5%. Calculate the two-month profit.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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