Question: 9. [10 marks] A $80 stock pays dividends with continuous yield 8 = 3%. The continuous annual risk free rate is 6%. Suppose you observe

9. [10 marks] A $80 stock pays dividends with continuous yield

9. [10 marks] A $80 stock pays dividends with continuous yield 8 = 3%. The continuous annual risk free rate is 6%. Suppose you observe a one-year forward price on this stock of $85. This forward contract is not correctly priced. a) Is this contract too expensive or too cheap? Explain. b) Based on your answer to part a) what arbitrage would you undertake? Demonstrate the arbitrage

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