Problem 2 Suppose you are interested in futures contract of a stock which pays dividends continuously at a dividend yield of 5% per year. The stock is currently selling at $30, and each futures contract is on 50 shares of stock. Moreover, the annual interest rate is 10% compounded annually. If you observe that the futures price with delivery date 1 year from now is $32 (per share of stock), is there arbitrage opportunity? If there is, construct a strategy to earn risk-free profit.

Problem 2 Suppose you are interested in futures contract of a stock which pays dividends continuously at a dividend yield of 5% per year. The stock is currently selling at $30, and each futures contract is on 50 shares of stock. Moreover, the annual interest rate is 10% compounded annually. If you observe that the futures price with delivery date 1 year from now is $32 (per share of stock), is there arbitrage opportunity? If there is, construct a strategy to earn risk-free profit.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 3P

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