The S&R index level is 900 at t=0. The dividend yield is 3% p.a. continuously compounded and

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The S&R index level is 900 at t=0. The dividend yield is 3% p.a. continuously compounded and the risk-free rate is 5% continuously compounded.

(a) What is the theoretical forward price with a maturity of 1 year?

(b) Suppose you observe a forward price with a maturity of 1 year equal to 950. What position do you take in order to earn arbitrage profit?

A. Long stock and short forward

B. Long stock and long forward

C. Short stock and long forward

D. Short stock and short forward

Related Book For answer-question

Introduction to Derivatives and Risk Management

ISBN: 978-1305104969

10th edition

Authors: Don M. Chance

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Posted Date: Apr 02, 2019 10:22 AM

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The S&R index level is 900 at t=0. The dividend yield is 3% p.a. continuously compounded and

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a Forward price F 0 S 0 erdT where S 0 current price 900 r riskfree rate 5 d divide... View the full answer

Introduction to Derivatives and Risk Management

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