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Consider a 7-month forward contract on a stock with a current price of $80. We assume...

Consider a 7-month forward contract on a stock with a current price of $80. We assume that the risk-free interest rate continuously compounded is 7.5% p.a. for all maturities. We also assume that dividends of $1 are expected after three months and six months.

a) What should be the theoretical forward price?

b) If the forward price is $81, use a cash ow table that is similar to what we learned in class to show how you would arbitrage from this forward price.

c) If the forward price is $82, use a cash ow table that is similar to what we learned in class to show how you would arbitrage from this forward price.

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