2. Suppose the risk-free interest rate is 3.50% compounded continuously. A dividend paying stock has a...

 

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2. Suppose the risk-free interest rate is 3.50% compounded continuously. A dividend paying stock has a current price of $70 and the four-month forward price of the stock is $71. The dividend of $0.50 per share will be received in exactly 1 month. There is an arbitrage opportunity here. How would one arbitrage the situation and how much could be made at the end of the four-month period by arbitraging the situation for 10,000 shares of the stock? 2. Suppose the risk-free interest rate is 3.50% compounded continuously. A dividend paying stock has a current price of $70 and the four-month forward price of the stock is $71. The dividend of $0.50 per share will be received in exactly 1 month. There is an arbitrage opportunity here. How would one arbitrage the situation and how much could be made at the end of the four-month period by arbitraging the situation for 10,000 shares of the stock?