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Question - You entered into a 3-year short forward contract on a no-dividend paying stock. This happens when the stock price is $65 and the risk-free rate of interest is 2.5% per annum with continuous compounding.
(a) Explain carefully the difference between the delivery price K, the forward price F0 and the value f of a forward contract.
(b) What are the forward price, the delivery price and the initial value of the forward contract?
(c) If the forward price for that contract is $67, what arbitrage opportunities does this create? How much will you gain with that strategy?
(d) Nine months later, the price of the stock is $65.5 and the risk-free interest rate is 2.3%. What are the strike price, the forward price and the value of the forward contract?
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