Find upper and lower bounds for the forward price

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Reference no: EM131243497

Forwards in presence of bid-offer spreads Let St be the current price of a stock that pays no dividends.

(a) Let r_BID be the interest rate at which one can invest/lend money, and r_OFFbe the interest rate at which one can borrow money, r_BID ≤ r_OFF. Both rates are continuously compounded. Using arbitrage arguments, find upper and lower bounds for the forward price of the stock for a forward contract with maturity T >t.

(b) How does your answer change if the stock itself has bid price S_t,BID and offer price S_t,OFF?

Reference no: EM131243497

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