Reference no: EM132675678
U want to short a 6-month forward contract on a stock. You contacted your bank and were offered a forward price of $39.85 [Note: This forward price is available only to customers who want to take a short position. Customers who want to take a long position will get a different quote.]. You also observe the following information:
-continuous compounding is required
-Current price of the stock = $40
-Expected dividend on the stock = $0.50, payable 3 months from now
-Your spot 3-month lending rate = 2.50% p.a. [i.e., This is the rate that you will get if you lend money for 3 months, starting now.]
-Your spot 3-month borrowing rate = 4.00% p.a. [i.e., This is the rate that you will have to pay if you borrow money for 3 months, starting now.]
-Your transaction cost in buying one stock in the spot market = $0.10, payable at the time of the transaction.
-Your transaction cost in short selling one stock in the spot market = $0.20, payable at the time of the transaction (This already includes the transaction cost for closing out the short-sale transaction).
Question: What is the minimum 6-month spot lending rate that you need to get in order for you to reject the bank's offer?
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