4. Suppose you could buy a plot of land today to build an office building in 1-year. The cost of the land today is 8 million. The building would sell for 30 million today. Given the current uncertainty, you determine that building's price can either go up in value by 25% over the next year or down by 20%. It costs 20 million to construct the building and the current risk-free rate is 1%. Assume that there is no delay in selling the building if you construct it in 1-year. (21 points) (a) Suppose someone offers you a forward contract that expires in 1-year on the price of an equivalent existing office building that has the same value and price movements of the one you are considering. What would be the fair value of this forward contract? Assume there are no interim rents and no depreciation. (4 points) (b) Suppose that the price on the forward offered above is higher than what you calculated. Describe an arbitrage transaction. (4 points) (c) Suppose you learn that if you choose not to construct the office building in one year, then you could sell the undeveloped land for 9 million regardless of the movements in building prices. What is the value of this project given this new information and the information outlined above? (9 points) (d) Explain why the value you calculate in part c) is different than the value you would get if you used the forward contract to lock in the price of the office building? (4 points)