The current price of stock XYZ is 120. Stock XYZ pays dividends continuously at a rate proportional
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The current price of stock XYZ is 120. Stock XYZ pays dividends continuously at a rate proportional to its price. The dividend yield is 4%. The continuously compounded risk-free interest rate is 6%. You observe a 1-year forward price of 121 on stock XYZ.
Describe, giving as many details as possible, actions you could take at time 0 to exploit an arbitrage opportunity and calculate the resulting profit (per unit of stock XYZ at expiration).
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By the second formula in 232 the fair 1year forward price is which is higher than th...View the full answer
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