NocturnalInsomniac
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#1
Report Thread starter 7 years ago
#1
Assume the spot price of the asset = £20
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? :confused:
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NocturnalInsomniac
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Report Thread starter 7 years ago
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Or I think it should actually be short a forward contract to buy one share in 3 months...
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NocturnalInsomniac
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Report Thread starter 7 years ago
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