Question

Suppose that the bid price of Google stock is $497 per share and the ask price...

Suppose that the bid price of Google stock is $497 per share and the ask price is $501 per share. Google does not pay any dividends. Short selling the stock is feasible at zero cost. You can borrow at an annual rate of 5.5 and lend at 4.0% (simple compounding). The commission of closing a forward position is $0.8 per share. What is the highest forward price that will not allow arbitrage? Please round to two decimal places.

Answer is 529.35. explain how answer was calculated.

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Answer #1

Forward Price of stock can be computed with following equation:

where,

F = Forward Price ( Highest price that will not allow arbitrage)

S0 = Current Ask Price of Stock

r = risk free rate of borrowing (higher of borrow or lend)

t = maturity

C = Commission of closing forward position

putting the values:

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