Construct an arbitrage portfolio for this contract

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Reference no: EM131022105

Suppose that at time 0, the market price of a share of XYZ stock is $24.90, that the stock pays dividends at a continuous annual rate of 2.5%, and that the risk free annual interest rate with continuous compounding is 4.9%. A 3 month prepaid forward contract is available for $25.10. Construct an arbitrage portfolio for this contract. Explain how you can exploit this situation to earn $10,000 risk free with certainty in three months.

Reference no: EM131022105

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