Digital Stock: Arbitrage Opportunity
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Provide a short justification the following:
The current price of Digital stock is $44 a share. You are offered a forward price for Digital stock to be delivered in one year of $42. The forward price is lower than the spot price because the market anticipates a sharp decline in the price of Digital stock, and the contract offers a way to hedge this risk. There is no arbitrage opportunity.
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Solution Summary
This response provides reasoning for why a forward price for Digital stock is lower.
Solution Preview
The statement is true.
(1) Any forward contract can be used as a mean to hedge future risks. In this particular case, one will be welling to purchase this future contract in speculation that the future stock price ...
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