A stock is expected to pay a dividend of 1.5 per share in 2 and 5 months.

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A stock is expected to pay a dividend of €1.5 per share in 2 and 5 months. The stock price currently stands at €100. The continuously compounded risk-free rate is 4% per annum.

1) What should be the futures price for a 7-month contract?

2) Suppose the futures price quotes €101. Does this create arbitrage opportunities? If there are, how can we exploit them?

3) Same question if the futures price quotes €98.

Related Book For answer-question

Fundamentals of Futures and Options Markets

ISBN: 978-0132993340

8th edition

Authors: John C. Hull

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Posted Date: Feb 28, 2024 06:15 AM

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A stock is expected to pay a dividend of 1.5 per share in 2 and 5 months.

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Expert Answer:

To calculate the futures price we can use the costofcarry model The futures price Ft is given by the ... View the full answer

Fundamentals of Futures and Options Markets

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