The current price of certain share on the market is 15,50EUR. We assume that this share is paying a dividend at the level of 9% yearly (continuous capitalisation). We also assume that there is fee (cost of keeping this share) for investor. It will be paid in three months in the amount of 0,56EUR. The term structure of interest rate is flat: 2% for any term. a) Please calculate the theoretical price price of 6 month future contract for this share. b) If the current market price of a 6 month future contract is equal to the current market price of share, please check if the arbitrage is possible. If yes indica the position that investor should take in arbitrage strategy, if no, explain why?

The current price of certain share on the market is 15,50EUR. We assume that this share is paying a dividend at the level of 9% yearly (continuous capitalisation). We also assume that there is fee (cost of keeping this share) for investor. It will be paid in three months in the amount of 0,56EUR. The term structure of interest rate is flat: 2% for any term. a) Please calculate the theoretical price price of 6 month future contract for this share. b) If the current market price of a 6 month future contract is equal to the current market price of share, please check if the arbitrage is possible. If yes indica the position that investor should take in arbitrage strategy, if no, explain why?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.2IP

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