What should have been the futures price

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Question - A futures contract on a share, which pays dividend at a continuously compounded rate of 4%, is written when the share has a price of $650, and the continuously compounded risk-free interest rate is 6%. The contract is priced at $655 and expires in 6 months.

(a) What should have been the futures price?

(b) Demonstrate how you could execute an arbitrage transaction and calculate arbitrage profit.

(c) Calculate the annualized return on such a transaction.

Reference no: EM133008854

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