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An Arbitrage Problem

  1. Nov 6, 2004 #1
    Hello all

    I encountered the following problem:

    A particular forward contract costs nothing to enter into at time t and obligates the holder to buy the asset for an amount F at expiry, T. The asset pays a divident DS at time t(sub-d), where 0 <= D <= 1 and t <= t(sub-d) <= T. Use an arbitrage argument to find the forward price F(t)

    Here is what I did:

    I made a chart

    Holding Worth Today(t) Worth at maturity(T)

    Forward 0 S(T) - F + DT

    -Stock -S(t) -S(T)

    Cash S(t) + S(t-sub(d)) S(t) + e^(r(T-t))


    Total S(t-sub(d)) + S(t) + e^(r(T-t)) - F


    I need to solve for F. Am I approaching this problem correctly? Any help would be greatly appreciated!

    Thanks
     
  2. jcsd
  3. Nov 7, 2004 #2
    would the dividend cancel out?
     
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