Devise a trading strategy to generate arbitrage profits


Problem: 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% :

Q1. What is the forward price implied by the Law of One Price?

Q2. Can you devise a trading strategy to generate arbitrage profits? How much would you earn per share?

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Finance Basics: Devise a trading strategy to generate arbitrage profits
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