A futures contract on a share, which pays dividend at a
continuously compounded rate of 3%, is written when the share has a
price of $790, and the continuously compounded risk-free interest
rate is 5%. The contract is priced at $800 and expires in 3
months.
(a) What should have been the futures price? [5]
(b) Demonstrate how you could execute an arbitrage transaction
and calculate arbitrage profit. [5]
(c) Calculate the annualized return on such a transaction.
[5]