5. 6 Answer all parts of this question. (a) Consider a stock with a current price of $120. This stock is not expected to pay any dividend over the next three months. i. What is the price of a 3 month forward contract on this stock assuming that the risk- free rate over the next three months is 5%. (7 marks) ii. How would your answer change if the stock was expected to pay $10 of dividends in three months time just before maturity of the forward contract? (3 marks) (b) A non-dividend paying stock is currently priced at 20. In each of the next two periods, it could either rise in price by 30% or fall in price by 29%. The one-period interest rate is 10%. A derivative exists that promises a payoff of 5 if, at the end of the second period, the price of the stock is above 16 and nothing otherwise. Compute the possible price paths of the stock and the possible payoffs of the derivative, and proceed to price the derivative using the risk-neutral method. (10 marks)