Deck 4 – Arbitrage & Cost of Carry

Why does income earned on the underlying reduce the forward price?

Income offsets carrying costs, lowering net cost of carry.

In a risk-neutral world, how are $F_0(T)$ and $E(S_T)$ related?

They are equal: $F_0(T)=E(S_T)$.

How do benefits from holding the underlying affect the no-arbitrage forward price?

They lower it by reducing net cost of carry.

When do a European call and put have the same price under put-call forward parity?

When $X=F_0(T)$, the option is at-the-money forward.