Consider a long forward contract to purchase a non-dividend paying stock in six months. The current spot price is 62, and the interest rate is 4% per annum. You observe a price of 61 on a forward contract that matures in six months.

a)Explain in words why you might think this is an arbitrage strategy and how you can capitalize on it.

b)Produce a statement of cash flows that shows the in-and outflows of cash today and in six months if you were to execute the arbitrage strategy. What is the risk-free gain?

Answer rating: 100% (QA)

a Explanation of Arbitrage Strategy An arbitrage strategy is a riskfree investment strategy that exp... View the full answer