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Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...

Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270.
a.        Is there an arbitrage opportunity? (sample answer: yes; or no)
b.       If there is an arbitrage opportunity, then will you long futures or short futures? (sample answer: Long; or Short)
c.        What is the arbitrage profit per share if there is an arbitrage opportunity in today’s dollar (PV of the profit) ignoring the transaction fee? (sample answer: $1.25)

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Answer #1

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

1. yes

2. long (F+ at 270)

3.

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