If the prepaid forward contract on a non-dividend paying stock sells for $85.25 and the annual required rate of return on the stock is 6.5%, which of the following 1 year forward contract prices does NOT represent an arbitrage opportunity?
A) $ 85.25
B) $ 89.56
C) $ 90.98
D) $ 91.32

Question

Quizplus · Accepted Answer

The forward price should be the prepaid forward price compounded at the risk-free rate. $85.25 compounded at 6.5% for one year is $85.25 * (1 + 0.065) = $90.98.

If the Prepaid Forward Contract on a Non-Dividend Paying Stock