A one-year long forward contract on Amazon is entered into when its stock price is $1,900 and the continuous compounded interest rate is 2.5%. Amazon pays no dividends. a) What are the fair forward price and the initial value of the forward contract

Missing word "If the forward price is set at $1,950, how would you arbitrage it?"

1. Fair forward price = stock price * e(nr) where n = time to maturity in years and r = continuous compounded interest rate

Amazon dividend yield is zero, as it does not pay dividends

Fair forward price = $1,900 * e(1*0.025)

Fair forward price = $1,948

Therefore, at initiation, the value of the forward contract would be zero since it is priced at its fair price

2. If the forward price is $1,950, the forward is overpriced. It can be arbitraged by selling the forward and buying the spot.

The stock would be borrowed in the spot market, and the forward contract sold at the same time. After 1 year, the stock is sold at the forward contract price of $1,950 and using these proceeds, the stock is bought at $1,948.10 in the spot market and returned to the lender. The arbitrage profit = $1950 - $1948.10 = $1.90

answerattainable;