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 is currently traded in the market at $43. 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? a) Long the forward, borrow money and buy the share b) Short the forward, short-sell the share and invest at risk-free rate c) Long the forward, short-sell the share and invest at risk-free rate d) Short the forward, borrow money and buy the share

A twelve-month short forward contract on a dividend-paying stock is entered into when the stock price is 133 and this stock is expected to pay a dividend of 5 in seven months. In addition, the risk-free rate of interest is 7.13% p.a. with semi-annual compounding for all maturities. Answer the following questions: (1) What are the forward price and the initial value of this forward contract? (2) Nine months later, the price of the stock is $152 and the risk-free rate of interest remains the same. What are the forward price and the value of the forward contract?

1. What should a trader do when the one-year forward price of an asset is too low?Assume that the asset provides no income:A. The trader should borrow the price of the asset, buy one unit of the asset and enter intoa short forward contract to sell the asset in one yearB. The trader should borrow the price of the asset, buy one unit of the asset and enter intoa long forward contract to buy the asset in one yearC. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate,enter into a long forward contract to buy the asset in one yearD. The trader should short the asset, invest the proceeds of the short sale at the risk-freerate, enter into a short forward contract to sell the asset in one year

Will an arbitrageur facing the following prices be able to make money? Yes, borrow €1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = €1.00; Invest at 4.1%; Hedge this with a long position in a forward contract.Yes, borrow $1,000,000 at 4.2%; Trade for € at the spot ask exchange rate $1.43 = €1.00; Invest €699,300.70 at 3.5%; Hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year). Cash flow in 1 year $237.76.No; the transactions costs are too high.All choices are incorrect.

Consider a long position in a two-years forward contract. The underlying asset is gold which incurs a net storage and security cost of 2% p.a., continuously compounded. The total value of the underlying gold today is $100 million. The risk-free rate of interest is 6.09% p.a. with semi-annual compounding for all maturities. Answer the following questions: (1) What are the forward price and the initial value of this forward contract? (2) One year later, the value of the gold is $120 million and the risk-free rate of interest remains the same. The net storage and security cost also remains the same. What are the forward price and the value of the forward contract?

Arbitrage