It is March 20th, 2020. An insurance company offers you the opportunity to enter into a forward contract to sell or buy ABC shares on December 20th, 2021 for $320.40. The interest rate is 5% per year (continuously compounded). The current price of ABC shares is $300. Is there an arbitrage opportunity? If so, what is it? If there is an arbitrage opportunity, please calculate your payoff on March 20th, 2020 and on December 20th, 2021.

Answer rating: 100% (QA)

To determine whether there is an arbitrage opportunity we need to compare the fair price of the forw... View the full answer