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Arbitrage free forward priceƒ 138

Suppose

Ä

arbitrage strategy

ƒ

t=t0

• Short forward:

0

-Buy security:

-S

t0

-Credit at r:

+S

t0

-Sum:

0

ƒ

t=T

• Fulfill forward:

+F

t0,T

• Credit repayment:

-S

et0

rT

• Dividends received and invested at r:

+Ze

rT

• Sum = Arbitrage profit:

Ft0,T

-(S

t0

-Z)e

rT

(

)

rT

t

T

t

e

Z

S

F

−

>

0

, 0

Derivative securities: Forwards - Pricing