2. The continuously compounded interest rate is r = 10%. A stock sells for $50

today. Assume that next period (one year) the stock will either

go up by 30% (to $65) with probability p = 70%;

go down by 20% (to $40) with probability 1 p = 30%.

(a) (10 points) What is the one-year forward price for the stock?

(b) (10 points) What is replicating portfolio for this futures contract?