Forward and Future Prices: Kramer, Inc.
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You observe that the one-year forward price of a share of stock in Kramer, Inc., a New York tour-bus company and purveyor of fine clothing, is $45.00 whereas the spot price of a share is $41.00. If the riskless yield on a one-year zero-coupon government bond is 5% :
a. What is the forward price implied by the Law of One Price?
b. Can you devise a trading strategy to generate arbitrage profits? How much would you earn per share?
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Solution Summary
This response provides calculations for the forward prices and arbitrage profits of Kramer, Inc.
Solution Preview
a. According to the Law of one price, the no-arbitrage value of the forward price is F = $43.05.
b. It ...
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