A stock is currently priced at $40. The risk-free rate of interest is 8% p.a. compounded continuously and an 18-month maturity forward contract on the stock is currently traded in the market at $38. You suspect an arbitrage opportunity exists. Which one of the following transactions do you need to undertake at time t = 0 to arbitrage based on the given information? Long the forward, short-sell the share and invest at risk-free rate Long the forward, borrow money and buy the share Short the forward, borrow money and buy the share Short the forward, short-sell the share and invest at risk-free r
A stock is currently priced at $40. The risk-free rate of interest is 8% p.a. compounded continuously and an 18-month maturity forward contract on the stock is currently traded in the market at $38. You suspect an arbitrage opportunity exists. Which one of the following transactions do you need to undertake at time t = 0 to arbitrage based on the given information? Long the forward, short-sell the share and invest at risk-free rate Long the forward, borrow money and buy the share Short the forward, borrow money and buy the share Short the forward, short-sell the share and invest at risk-free r
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 14P
Related questions
Question
A stock is currently priced at $40. The risk-free rate of interest is 8% p.a. compounded continuously and an 18-month maturity forward contract on the stock is currently traded in the market at $38. You suspect an arbitrage opportunity exists.
Which one of the following transactions do you need to undertake at time t = 0 to arbitrage based on the given information?
Long the forward, short-sell the share and invest at risk-free rate |
||
Long the forward, borrow money and buy the share |
||
Short the forward, borrow money and buy the share |
||
Short the forward, short-sell the share and invest at risk-free rate |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning