The current price of a non-dividend paying stock is 172.5. The continuously compounded risk free rate is 0.03. A savvy investor notices a mispriced five-year forward contract to pay 196 in exchange for one share of the stock. In order to exploit this mispricing, the investor shorts a share of the stock now, invests the money gained in the account earning 0.03, and then plans to settle the forward contract in five years. What is the final net earned by the investor?
The current price of a non-dividend paying stock is 172.5. The continuously compounded risk free rate is 0.03. A savvy investor notices a mispriced five-year forward contract to pay 196 in exchange for one share of the stock. In order to exploit this mispricing, the investor shorts a share of the stock now, invests the money gained in the account earning 0.03, and then plans to settle the forward contract in five years. What is the final net earned by the investor?
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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The current price of a non-dividend paying stock is 172.5. The continuously compounded risk free rate is 0.03. A savvy investor notices a mispriced five-year forward contract to pay 196 in exchange for one share of the stock. In order to exploit this mispricing, the investor shorts a share of the stock now, invests the money gained in the account earning 0.03, and then plans to settle the forward contract in five years. What is the final net earned by the investor?
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