Arbitrage free forward price 140
Suppose
Ä
arbitrage strategy
t=t0
- Short forward:
0
-Buy security:
-S
t0
- Pay storage costs:
-L
-Credit at r:
+S
t0
+L
-Sum:
0
t=T
- Fulfill forward:
+F
t0,T
- Credit repayment:
-(S
+L)et0
rT
- Sum = Arbitrage profit:
Ft0,T
-(S
t0
+L)e
rT
(
)
rT
t
T
t
e
L
S
F
+
>
0
, 0
Derivative securities: Forwards - Pricing