Suppose General Motors (GM) stock sells for 25 dollars a share today. The stock will pay...

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Suppose General Motors (GM) stock sells for 25 dollars a share today. The stock will pay a dividend of 2 dollars at the end of the year. The annual risk free rate is 4 percent. (a) What is the forward price for buying GM one year from now assuming no arbitrage? (b) How much would you be willing to pay for the opportunity to buy a share of GM at a forward price of 20 dollars a year from now? (c) Suppose that the forward price of GM is 20 dollars. Propose a trading strategy that gives you a positive profit today and costs you nothing in the future which exploits this arbitrage opportunity. Suppose General Motors (GM) stock sells for 25 dollars a share today. The stock will pay a dividend of 2 dollars at the end of the year. The annual risk free rate is 4 percent. (a) What is the forward price for buying GM one year from now assuming no arbitrage? (b) How much would you be willing to pay for the opportunity to buy a share of GM at a forward price of 20 dollars a year from now? (c) Suppose that the forward price of GM is 20 dollars. Propose a trading strategy that gives you a positive profit today and costs you nothing in the future which exploits this arbitrage opportunity.

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a The forward price for buying GM one year from now assuming no arbitrage can be calculated using th... View the full answer