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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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