Suppose that the risk-free rate is 8%. However, as a small investor, you can invest money at 7% only and borrow at 10%. Does either of the strategies in the proof of Proposition 6.2 give an arbitrage profit if F(0, 1) = 89 and S(0) = 83 dollars, and a $2 dividend is paid in the middle of the year, that is, at time 1/2?
Question 6.4: Suppose that the risk-free rate is 8%. However, as a small i...
No arbitrage profit can be realised in these circumstances. Though the theoretical no-arbitrage forward price is about $87.83, the first strategy in the proof of Proposition 6.2 brings a loss of 89−83e^{10\%} +2e^{0.5×7\%} ≅ −0.66 dollars and the second one results in a loss of −89 + 83e^{7\%} − 2e^{0.5×10\%} ≅−2.08 dollars.
Related Answered Questions
The present value of the dividends is
div_0...
The return on the index will be 3.37\% [/la...
Observe that Theorem 6.5 on the equality of future...
Since f(t, T)=S(t)e^{r(T−t)} , the...
Let t = 1/365, T = 1/4. We apply the formula (6.11...
By (6.3)
F(0, T) = [S(0) − e^{−rt}div]e^{r...
At time t
borrow and pay (or receive and invest, ...
The euro plays the role of the underlying asset wi...
We take 1 January 2000 to be time 0. By (6.2)
[lat...
Yes, there is an arbitrage opportunity. We enter i...