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Cash-and-carry arbitrage

MediumFinance & Derivatives~4m

A non-dividend stock trades at $100 and the continuously-compounded financing rate is 5%5\%. A dealer quotes a 1-year forward at $108. This forward is mispriced, so a riskless cash-and-carry arbitrage exists. What profit (in dollars, to two decimals) does it lock in per share, realized at delivery in one year?

Show hints (2)+
  1. Manufacture the forward: borrow, buy spot, carry it - that cost is the fair forward SerTSe^{rT}.
  2. Arb =108−100e0.05=108-100e^{0.05}, realized at delivery.

Answer

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2.87 (± 0.02)

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