What are the initial and terminal cash flows

Reference no: EM133269854

Question - Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock price is $60 and the risk-free interest rate is 8% pa. It is also known that the stock will pay a $2 dividend at the end of year 1. The current settlement price for the futures contract is $62. Set up a strategy for an arbitrage profit. What are the initial and terminal cash flows from the strategy? Assume that investors can short-sell or buy the stock on margin and that they can borrow and lend at the risk- free rate. There are no margin requirements, transactions costs, or taxes.

Reference no: EM133269854

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