Prepaid forward contract at prepaid forward price

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Reference no: EM131813287

A non-dividend paying stock has a price at time 0 of $100. The force of interest is 10%.

a) Suppose an investor is willing to buy a prepaid forward contract at a prepaid forward price of $105 on a one year prepaid forward contract. Show how to make an arbitrage gain under these circumstances.

b) Suppose that an investor is willing to sell a prepaid forward contract at a prepaid forward price of $95 on a one year prepaid forward contract. Show how to make an arbitrage gain under there circumstances.

Reference no: EM131813287

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