Explain the arbitrage bounds on the 1-year forward contracts

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Suppose you are looking at forward contracts on Apple stock (AAPL). The stock price is currently $135.70-135.72 in the spot market. You have found the best rates at which you can borrow and lend $150,000 at are 1.75% and 1.10% per annum with continuous compounding. You pay a transaction cost in both markets of $5 per trade.

a. What are the arbitrage bounds on the 1-year forward contracts? Make sure to label the bound on the bid and the ask price.

b. If the forward bid and ask price are $138.92 and $138.97 is there an arbitrage to exploit?

Reference no: EM132012865

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