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By using the information above and applying the

[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.

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