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Make a risk-free profit with zero initial investment

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Reference no: EM132998460

A share currently trades at $10 and will pay a dividend of 50 cents in one month's time. An investor can enter into a forward contract now under which he/she agrees to buy or sell the share in 6 months' time for $9.70, depending on his/her position in the forward contract. Assume that an investor can always borrow/lend at a risk-free force of interest of 3% p.a., determine whether arbitrage opportunity exists in this scenario. If so, show how an investor can make a risk-free profit with zero initial investment. Assume all months are of equal length.

Reference no: EM132998460

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