Suppose Blackrock stock (ticker: BLK) is trading at $400 and pays a discrete dividend of $3 to its shareholders once per quarter, the first dividend of $3 to be paid in 0.25 years from today, the second dividend of $3 to be paid in 0.5 years from today, the third dividend of $3 to be paid in 0.75 years from today, and the fourth dividend of $3 to be paid in 1 year from today. The continuously compounded annual risk-free interest rate that you can lend or borrow at is 8%. In this problem, you are to use continuous compounding of interest in all computations. 1. What is the fair value price for a one-year prepaid forward contract on BLK?
2. Suppose the market prices for a normal (not prepaid) 1-year forward contract on Blackrock are as follows:
bid price for BLK forward contract: $520.95
ask price for BLK forward contract: $530.95
Does an arbitrage opportunity exist? If so, specify the exact components of the portfolio you need to capture the arbitrage, and the exact arbitrage profit.