Question: The question down also when you answer write table Arbitrage with an Overvalued Forward 0 For example, suppose F = 98. Then, the forward is

The question down also when you answer write table

Arbitrage with an Overvalued Forward 0 For example, suppose F = 98. Then, the forward is overvalued relative to spot, so we want to sell forward, buy spot, and borrow. Buying and holding the spot asset leads to a cash outflow of 95 today, but we receive a coupon of $5 in 3 months. There are may ways to structure the arbitrage strategy. Here is one. We split the initial borrowing of 95 into two parts, with one part repaid in 3 months with the $5 coupon, and the balance repaid in six months with the delivery price received on the forward contract. Cash Flows from the Aribtrage CF Source CF Today CFin3mo CF in 6mo Short Forward +98.00 Long bond 95 Coupon +5.00 3-month borrowing +4.88 5,.00 6-month borrowing +90.12 94.74 Net CF 0 0 +3.26 4 Question: What is the arbitrage strategy if F = 91.50

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