Question 1

  • June 25, 2021

Question 1 (10 marks) It is March 20, 2007. An insurance company (that is too big to fail) offers you the opportunity to enter into a forward contract to sell ABC shares on December 20, 2008 for $112.07.The interest rate is 4% (continuously compounded. The current price of ABC shares is $100 and ABC does not pay dividends. ()Calculate the no-arbitrage forward price of ABC shares. (2 marks) Show your calculations. (b)Is there an arbitrage opportunity? (8 marks) If so, explain why and describe what actions to take to make the arbitrage profit. How much is the profit? Show your calculation. If not, explain why not.

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