John Chan considers buying a six-month stock futures contract on the shares of Li & Fung Limited. Shares of Li & Fung Limited are nowtrading at $50 per share and it is expected that Li & Fung Limited will pay a dividend of $1 per share in one month and four months. The risk free interest rate is 5% per annum with continuous compounding.
a Evaluate the estimated price of the six-month Li & Fung Limited stock futures contract.
b If the actual futures price of Li & Fung Limited shares is $50, is there any arbitrage opportunity? Outline the steps required to do thearbitrage.