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The risk-free rate of interest for borrowing is 3.8% per annum with continuous compounding, and the...

The risk-free rate of interest for borrowing is 3.8% per annum with continuous compounding, and the corresponding risk-free rate for lending is 1% per annum lower. The dividend yield is 1.0% per annum. The current value of a stock index is 1,084. There are no other transaction costs involved in arbitrage. What is the highest six-month futures price that will preclude arbitrage? Use one decimal place for your answer. The last expert said this question needs more information, but this is what was asked by my professor.

The answer is 1,099.3, how do you solve this?

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Answer #1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

BORROWING RATE IS IMPORTANT AS WE ASSUME THAT IF WE BOOROW MONEY TO BUY THE INDEX

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