If the risk-free rate is greater than the dividend yield, then we know that ________. A) the futures price will be higher as contract maturity increases B) F₀ S_T D) arbitrage profits are possible

Question

If the risk-free rate is greater than the dividend yield, then we know that ________. A) the futures price will be higher as contract maturity increases B) F₀ < S₀ C) F_T > S_T D) arbitrage profits are possible

Quizplus · Accepted Answer

When the risk-free rate is greater than the dividend yield, the cost of carry model suggests that the futures price will increase with longer maturities, as the cost of holding the asset (financed at the risk-free rate) outweighs the income from dividends.

If the Risk-Free Rate Is Greater Than the Dividend Yield