What arbitrage opportunity exists

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A stock is expected to pay a dividend of $1 per share in 2 months and $1 in 5 months. The stock price is $100, and the risk-free rate of interest is 6% per annum with continuous compounding.

1.a. What should be the forward price for a contract deliverable in 6 months? Do you think this market is an example of contango or backwardation? What is the initial value of the forward contract?

1.b. Another market participant quotes you the 6-month forward price at $105. What arbitrage opportunity exists? If one exists, explicit all cash flows for the arbitrage.

Reference no: EM133118748

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