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What is the value of ft

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Reference no: EM131104819

An at-the money call written on a stock with current price St = 100 trades at 3. The corresponding at-the -money put trades at 3.5. There are no transaction costs and the stock does nor pay any dividends. Traders can borrow and lend at a rate 5% per year and all markets are liquid.

(a) A trader writes a forward contract on the delivery of this stock. The delivery will be within 12 months and the price is Ft. What is the value of Ft?

(b) Suppose the market starts quoting a price Ft = 101 for this contract. Form two arbitrage portfolios.

Reference no: EM131104819

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