The ask price for a share of ABC company is 100.50 and the bid price is 100.
Question:
The ask price for a share of ABC company is 100.50 and the bid price is 100. Suppose an investor can borrow at an annual effective rate of 3.05% and lend (i.e., save) at an annual effective rate of 3%. Assume there are no transaction costs and no dividends.
Determine which of the following strategies does not create an arbitrage opportunity.
(A) Short sell one share, and enter into a long one-year forward contract on one share with a forward price of 102.50.
(B) Short sell one share, and enter into a long one-year forward contract on one share with a forward price of 102.75.
(C) Short sell one share, and enter into a long one-year forward contract on one share with a forward price of 103.00.
(D) Purchase one share with borrowed money, and enter into a short one-year forward contract on one share with a forward price of 103.60.
(E) Purchase one share with borrowed money, and enter into a short one-year forward contract on one share with a forward price of 103.75.
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C Prelude In the presence of market frictions the fair forward price will no longer be a unique valu...View the full answer
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