The expected rate of return on the stock index S is 12%. The continuously compounded...
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The expected rate of return on the stock index S is 12%. The continuously compounded risk-free rate of return is 5%. The continuously compounded dividend yield on the stock index is 2%. The current price of S is 100. You are considering two different options to purchase this stock: 1) an outright purchase, and 2) a long forward contract with a maturity date 1 year from today.
Calculate the expected profit on the long forward one year from today, assuming the forward is currently priced at the no-arbitrage level.
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