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Question: Problem 3. [Cash-and-carry with different interest rates] In real life, borrowing rates are higher than lending rates. Suppose that you can borrow at ( r_{B}=6 % ) but can only invest at ( r_{I}=3 % ). Both rates are annualized, continuously compounded. Given that ( S_{0}=30 ) and the asset pays continuous proportional dividends of ( delta=5 %

by Essaynice Tutors | Jun 8, 2023 | solved assignments

Problem 3. [Cash-and-carry with different interest rates] In real life, borrowing rates are higher than lending rates. Suppos $Given that ( S_{0}=30 ) and the asset pays continuous proportional dividends of ( delta=5 % ), derive the range of ( 1$

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Problem 3. [Cash-and-carry with different interest rates] In real life, borrowing rates are higher than lending rates. Suppose that you can borrow at

r_{B} = 6%

but can only invest at

r_{I} = 3%

. Both rates are annualized, continuously compounded.
Given that

S_{0} = 30

and the asset pays continuous proportional dividends of

? = 5%

, derive the range of

1/2

-year forward prices on this asset that are consistent with no-arbitrage. Use cash-and-carry strategies to justify your answer.

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