On April 1, 2012, you observe the following quotes: Spot: $20.50 bid, $21 ask Futures deliverable on
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On April 1, 2012, you observe the following quotes: Spot: $20.50 bid, $21 ask Futures deliverable on December 1, 2012: $20 The spot asset will pay a single dividend of $0.75 on September 1, 2012, You can borrow and lend at 4% annual rate Apr 1st to Sep 1st: 150 days Sep 1st to Dec 1st: 90 days Assume discounts are correct; don't bother counting Use a 360-day year and continuous compounding. Can you arbitrage?
Show the cash flows that make each type of arbitrage (cash-and-carry and reverse) either profitable or unprofitable. Explain in words what you would do at each relevant date.
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