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In real-life borrowing rates are higher than lending rates. Suppose that you can borrow at r1 = 4% but can only invest at r2 = 2%. Both rates are annualized, continuously compounded. Given that S0 = 70 and the asset pays continuous dividends of δ = 2%, derive the range of 2-year forward prices on this asset that are consistent with no-arbitrage. Use cash-and-carry strategies to justify your answer

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Financial Management, Finance

Category:- Financial Management
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