To design an arbitrage transaction using the given forward contract, follow these steps: Borrow 40...
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To design an arbitrage transaction using the given forward contract, follow these steps: Borrow at the riskfree rate per annum for months. Buy one Sigma stock at the current market price of Enter into the forward contract to sell the Sigma stock in months for Cash Flows and Steps: Initial Investment: Borrow : You receive Buy Sigma stock: You spend Net cash flow at time : since the borrowed amount is used to buy the stock At Maturity months later: Repay the loan: The amount to re Explanation: Arbitrage Opportunity: The forward price of is higher than the future value of the current stock price compounded at the riskfree rate which would be This discrepancy allows for a riskfree
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