What is the arbitrage profit from this cash-and-carry trade

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Reference no: EM13949329

Suppose you sell a forward contract at $105 and buy the underlying asset at $89. You borrow cash to buy the underlying asset, paying 10% (annual rate). The asset produces a cash flow of 2% (that is, 2% of the cash price of the underlying asset) that is paid at the end of one year. What is the arbitrage profit from this cash-and-carry trade? Is the $105 price of the contract an equilibrium price (i.e. can it last)? What is the theoretical forward price of the asset assuming one can borrow or lend at the same risk-free rate of 10%?

Reference no: EM13949329

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