What is the six-month forward price of the stock

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Problem I. The current price of a stock is $60. The one-year call option on the stock at a strike of $60 is trading at $10. If the one-year rate of interest is 10%, is the call price free from arbitrage, assuming that the stock pays no dividends? What if the stock pays a dividend of $5 one day before the maturity of the option?

Problem II. The current price of ABC stock is $50. The term structure of interest rates (continuously compounded) is flat at 10%. What is the six-month forward price of the stock? Denote this as F. The six-month call price at strike F is equal to $8. The six-month put price at strike F is equal to $7. Explain why there is arbitrage opportunity given these prices.

Reference no: EM133583654

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