Question: Suppose you currently hold a security valued at R 7 5 0 , and the prevailing risk - free rate is 5 . 5 %

Suppose you currently hold a security valued at R

750,

and the prevailing risk

-

free rate is

5.5 % .

You plan to sell this security in three months the theoretical forward contract price is calculated at R

760.12

and will be used to hedge against potential price declines. Now, if the dealer offers a tradable price to unlock the arbitrage profit of R

745

on the forward contract, determine the arbitrage opportunity available to you, and subsequently, provide a calculation for the potential arbitrage profit?

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