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5. Suppose that bond ABC is the underlying asset for a forward contract with settlement six months from now. You know the following about bond
5. Suppose that bond ABC is the underlying asset for a forward contract with settlement six months from now. You know the following about bond ABC and the forward contract: (1) In the cash market ABC is selling for $80 (par value is $100); (2) ABC pays $8 in coupon interest per year in two semiannual payments of $4, and the next semiannual payment is due exactly six months from now; and (3) the current six-month interest rate at which funds can be loaned or borrowed is 6% (annual number). a. What is the theoretical price of the forward contract? b. What action would you take if the forward price is $83? c. What action would you take if the forward price is $76
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