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Calculate the forward price on this contract

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Reference no: EM132550152

Question - An assumption is made that you own a security currently worth K500. You plan to sell it in two months. To hedge against a possible decline in price during the next two months, you enter into a forward contract to sell the security in two months. The risk - free is 3.5%.

Required -

a. Calculate the forward price on this contract.

b. Suppose the dealer offers to enter into forward contract at K498. Indicate how you could earn an arbitrage profit.

c. After one month, the security sells for K490. Calculate the gain or loss to your position.

Reference no: EM132550152

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