Calculate the amount of arbitrage profit

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Reference no: EM131972585

The current continuously compounded risk free rate is 1% per annum for all maturities. The interest rate may fluctuate randomly in the future. A company XYZ will not pay dividend in the next ten years.

The two-year forward price of XYZ is $55 per share. Assuming no arbitrage exists, find the five-year forward price of XYZ.

Suppose the five-year forward price of XYZ is57 $/share. Is there an arbitrage opportunity? Why?

Clearly describe an arbitrage strategy using two-year and five-year forward contracts given the forward prices given above. You must not trade XYZ on the spot market. You may long or short only one share of XYZ using the five-year forward contract. Describe the trades (amount and direction) and your actions right now, in two years, and in five years.

Calculate the amount of arbitrage profit you can realize in five years.

Reference no: EM131972585

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