1. A forward contract is an agreement to buy or sell an asset at a certain...

Transcribed Image Text:

1. A forward contract is an agreement to buy or sell an asset at a certain future time for a certain price (called the forward price). At the time a forward contract is entered into by two parties, no money changes hands. The investor who agrees to buy the asset at the future time is said to hold the long position in the contract and the investor who agrees to sell the asset is said to hold the short position in the contract. Suppose that a stock is currently selling for $30 per share. A (long position in a) forward contract is available to buy 100 shares of the stock 3 months from now for $30.25 per share. Suppose that a bank is offering interest at the rate of 5% per annum (compounded continuously) on a 3-month deposit. Describe a strategy for creating an arbitrage profit and compute the amount of the profit. 1. A forward contract is an agreement to buy or sell an asset at a certain future time for a certain price (called the forward price). At the time a forward contract is entered into by two parties, no money changes hands. The investor who agrees to buy the asset at the future time is said to hold the long position in the contract and the investor who agrees to sell the asset is said to hold the short position in the contract. Suppose that a stock is currently selling for $30 per share. A (long position in a) forward contract is available to buy 100 shares of the stock 3 months from now for $30.25 per share. Suppose that a bank is offering interest at the rate of 5% per annum (compounded continuously) on a 3-month deposit. Describe a strategy for creating an arbitrage profit and compute the amount of the profit.

Answer rating: 100% (QA)

Arbitrage Strategy with Forward Contract and Interest Rate Heres a strategy to create an arbitrage profit using the forward contract and the interest ... View the full answer