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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