[No-Arbitrage Determination of Forward Price]
The information of the forward price and stock price is provided below:
Forward price F0 $226
Stock/Spot Price S0 $204
Maturity date of Forward Contract (2 years) T 2
Risk-free Rate r 4%
Step (1) By using the information above and applying the Cost-of-Carry Model, verify if there is an arbitrage opportunity.
Step (2) In addition, clearly explain and illustrate the arbitrage (“Cash-and-Carry”) strategy and compute the arbitrage profit.
Hint: the “Cash-andCarry” strategy should demonstrate how a portfolio of forward, stock, and risk-free lending/borrowing can produce risk-free arbitrage profit.