5) An investor holds title to an asset worth 125.72. To raise money for an unrelated purpose, the investor plans to sell the asset in nine months. The investor is concerned about uncertainty in the price of the asset at that time. The investor learns about the advantages of using forward contracts to manage this risk and enters into such a contract to sell the asset in nine months. The risk-free interest rate is 5.625 percent.

a) Determine the appropriate price the investor could receive in nine months by means of the forward contract.

b) Suppose the counterparty to the forward contract is willing to engage in such a contract at a forward price of 140. Explain what type of transaction the investor could execute to take advantage of the situation. Calculate the rate of return (annualized), and explain why the transaction is attractive.

c) Suppose the forward contract is entered into at the price you computed in Part a). Two months later, the price of the asset is 118.875. The investor would like to evaluate her position with respect to any gain or loss accrued on the forward contract. Determine the market value of the forward contract at this point in time from the perspective of the investor in Part a).

d) Determine the value of the forward contract at expiration assuming the contract is entered into at the price you computed in Part a) and the price of the underlying asset is 123.50 at expiration. Explain how the investor did on the overall position of both the asset and the forward contract in terms of the rate of return.