You take a long position in a one-year forward contract on a stock whose price you expect to increase in the future. The current price of the stock is $100 per share. The interest rate is 10% continuously compounded and the stock pays dividends of $2 in both 4 months and 8 months from now.

Four months later, i.e., at t = 10 months, you need to sell your long positions in the two forward contracts.

If the current price of the stock is $120 per share, how much money will you receive from selling your two long positions?

How much money did you invest in total? Did you take advantage of an arbitrage opportunity? Explain your answer (why or why not).

Answer rating: 100% (QA)

To calculate the money received from selling the two long positions in the forward contracts we need ... View the full answer