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Suppose XYZ stock costs $100/share today and is expected to pay $1.25/share quarterly dividend with the first coming 3 months from today and the last just prior to the end of the year (from today). Price a one-year forward contract on the XYZ stock if you know that the annual continuously compounded risk-free rate is 10%. If the one –year forward contract on XYZ stock is listed at $108, do you see any arbitrage profit opportunity in this case? If yes, what strategy you will apply to reap that profit? Please explain your answer by detailing the cash flows today and at expiration to realize the arbitrage profit.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92852094

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