1) You go out to the market and see that MMM stock is trading for $182.03 today and the

2 year forward price is $187.26. Assume MMM doesnt pay dividends. You also see that

the interest rate is 2.1% per year, continuously compounded. Create an arbitrage

portfolio that pays exactly $15 in 2 years and costs nothing today.

2) We assumed that MMM doesnt pay dividends. Now what if MMM pays dividends at a

constant rate of 3.5% per year. Create an arbitrage portfolio that pays exactly $100

today and has no obligations in the future.

3) Now suppose you dont know what the actual interest rate is, based on the current

MMM price, dividend rate, and the forward price what is the effective annual interest

rate? Create a 2 year, zero coupon bond with a face value of $100 from a portfolio of

stock and forward. That is, create a portfolio that costs a little less than $100 today, and

at time T pays $100. Your answer should tell me exactly how many shares of stock and

forward to go long/short.