Determine the arbitrage profit

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A forward contract on a stock with 3-month expiration is currently priced at $900, while the stock is currently priced at $956. The issuing company of the stock has just announced its latest quarterly earnings and the upcoming dividend distribution of $20 per share with an ex-date of 2 month from today. The continuously compounded 2 month, 3-month and 6-month risk-free interest rates are 2.70%, 2.90%, and 3.10% per annum, respectively. Prove that there is a clear arbitrage opportunity. Describe the actions you would take to exploit the arbitrage opportunity and determine the arbitrage profit.

Reference no: EM132951326

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