1.A pension fund owns 100,000 shares of the AAA Corp. as a part of a long-term investment portfolio. The fund manager can buy shares of the AAA Corp. at $ 150 per share. She can also sell shares of the AAA Corp. at $ 149 per share. The manager can borrow funds at 9% per year and invest funds at 8.5% per year (assumingannual compounding). For what range of one-year forward prices of AAA Corp. does the manager have no arbitrage opportunities?

Hint: Suppose the forward price is undervalued, discuss the hedging strategy and determine an equilibrium price. Then assume the price is overpriced, discuss the hedging strategy accordingly and determine an equilibrium price.

Answer rating: 100% (QA)

To determine the range of oneyear forward prices of AAA Corp where the manager has no arbitrage oppo... View the full answer