Question: Please answer part b. (better includes part a, thanks) Problem 1. (Arbitrage, 9') Two parties enter a stock forward at time t=0 that expires at

Please answer part b. (better includes part a, thanks) Please answer part b. (better includes part a, thanks) Problem 1. (Arbitrage,

Problem 1. (Arbitrage, 9') Two parties enter a stock forward at time t=0 that expires at t=T. The underlying stock pays a stream of dividends at a known and constant dividend yield . The risk-free rate is a known constant r. Use continuous compounding. (a) Suppose I want to have one share of the stock at time T by buying some stocks at time 0 and hold them. How many shares of the stock shall I buy at t=0 ? (Assume I am allowed to trade a fraction of a share.) (3') (b) The no-arbitrage forward price is F0,T=S0e(r)T. Show the arbitrage tables (cash flow tables for the arbitrage strategies) when the forward is overpriced or underpriced, respectively. (6')

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