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A futures contract on a share, which pays dividend at a continuously compounded rate of 3%,...

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Finance

A futures contract on a share, which pays dividend at acontinuously compounded rate of 3%, is written when the share has aprice of $790, and the continuously compounded risk-free interestrate is 5%. The contract is priced at $800 and expires in 3months.

(b) Demonstrate how you could execute an arbitrage transactionand calculate arbitrage profit. [5]

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3.8 Ratings (510 Votes)
No arbitrage price of the future contract F S x erf d x T where S Spot rate 790 rf risk free rate 5 d 3 and T time to maturity 3 months 3 12 025 year Hence F 790 x e5 3 x 025    See Answer
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A futures contract on a share, which pays dividend at acontinuously compounded rate of 3%, is written when the share has aprice of $790, and the continuously compounded risk-free interestrate is 5%. The contract is priced at $800 and expires in 3months.(b) Demonstrate how you could execute an arbitrage transactionand calculate arbitrage profit. [5]

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