What does shorting a forward contract mean? Watch
3 month risk-free rate = 5% per annum
Consider the following situations:
(i) Forward price is too high = £21.50
Arbitrageur can borrow £20 @ 5% p/a
Buy 1 share and short a forward contract to sell one share in 3 months.
Sell share in 3 months @ £21.50
Pay off loan @ 20e0.05x0.25 = £20.25
Locked in arbitrage profit of £1:25 per share
I understand everything except for the bit in bold. Shouldnt it just be buy(long) a forward contract to sell one share in 3 months?