Forward Prices and Arbitrage Question
The Citigroup stock is trading at $100 per share. The risk-free interest rate (annualized, continuously-compounded) is 5%. The market assumes that Citigroup will not pay any dividends within the next 3 months.
a. What is the forward price to purchase one share of Citigroup stock in 3 months?
b. Suppose that Citigroup suddenly announces a dividend of $1 per share in exactly 2 months and assume that the Citigroup stock price does not change upon the announcement. What is the new 3-month forward price for the Citigroup stock?
c. If, after the dividend announcement, the 3-month forward price stays the same, how would you make an arbitrage profit from the market’s mispricing?