Assume you own an 2006 car currently worth 4500 you plan to, Ask an Expert

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Assume you own an 2006 car currently worth $4,500. You plan to sell it in 3 months and you anticipate the price of the car to depreciate further over the next 3 months. The discrete risk free rate is 2.5%. (Use “Pricing_Simple Discrete Model”)

A. To hedge against a possible decline in price during next 3 months, please explain should you go Long or Short on a Forward contract?

B. Calculate the “no-arbitrage” forward price on this contract (Fo).

C. After 1 month, the car sells for $3,800, and you entered into the forward contract at the “no-arbitrage” forward price above. (Vt) Calculate the gain or loss to your position.

Instead, if you are an arbitrageur, and the dealer offers to enter into a forward contract at $4,800. Indicate how you can earn an arbitrage profit (without currently owning the car asset) and what is the Total Arbitrage Profit..

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92799985

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