(i) The current price of a stock is 1,000. (ii) The stock pays dividends continuously at a...

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(i) The current price of a stock is 1,000.

(ii) The stock pays dividends continuously at a rate proportional to its price.

(iii) The continuously compounded risk-free interest rate is 5%.

(iv) A 6-month forward price of 1,020 is observed in the market.

Describe actions you could take to exploit an arbitrage opportunity and calculate the resulting profit (per stock unit) in each of the following cases:

(a) The dividend yield of the stock is 0.5%

(b) The dividend yield of the stock is 2%

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Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:17 AM

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(i) The current price of a stock is 1,000. (ii) The stock pays dividends continuously at a...

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Heres how to calculate the price of a 1year forward contract given the provided information Determine the Discrete Dividend Payments Since the dividend yield changes throughout the year we need to cal...View the full answer

Derivative Pricing

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