(a) Explain why the following is an example of an arbitrage. There are two securities A and B. At time t=0 the securities cost P0A and P0B respectively. The term of the securities is 1 year. At t=1 either the market goes up and the securities pay P1A(u),P1B(u) or the market goes down with payments P1A(d),P1B(d). Investors buy a security by paying the time 0 price and receiving time 1 income. Investors sell a security by receiving the time 0 price and paying time 1 outgo. Assume (b) Show that the forward price K for a security with no income is K=S0eT where S0 is the current price of the security, is the force of interest, and T is the time when the contract will mature. (c) A three-month forward contract exists in a zero-coupon corporate bond with a current price per 100 nominal of 52.50. The yield available on three-month government securities is 7% per annum effective. Calculate the forward price. (a) Explain why the following is an example of an arbitrage. There are two securities A and B. At time t=0 the securities cost P0A and P0B respectively. The term of the securities is 1 year. At t=1 either the market goes up and the securities pay P1A(u),P1B(u) or the market goes down with payments P1A(d),P1B(d). Investors buy a security by paying the time 0 price and receiving time 1 income. Investors sell a security by receiving the time 0 price and paying time 1 outgo. Assume (b) Show that the forward price K for a security with no income is K=S0eT where S0 is the current price of the security, is the force of interest, and T is the time when the contract will mature. (c) A three-month forward contract exists in a zero-coupon corporate bond with a current price per 100 nominal of 52.50. The yield available on three-month government securities is 7% per annum effective. Calculate the forward price