Forward and Futures

ConceptMedium~15 min· Other Finance Questions

Problem

A stock trades at $S_0 = \$ 100 $. T h eco n t in u o u s l y co m p o u n d e d r i s k - f r eer a t e i s$ r = 4% $. The stock will pay a $2 cash dividend in 3 months. A 6-month forward contract on the stock is currently quoted at$ F_{obs} = $99$.

Part A

Compute the fair (no-arbitrage) forward price.

Part B

Describe the arbitrage strategy and the per-share profit.

Part C

Briefly: how do futures contracts differ from forwards, and why might their prices diverge?

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