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A stock is expected to pay a dividend of $1 per share in 3 months and again in 6 months. The stock price is $100and

A stock is expected to pay a dividend of $1 per share in 3 months and again in 6 months. The stock price is $100and the risk-free rate of interest is 2% per annum with continuous compounding for all maturities. An investor has just taken ashortposition in a 6-month forward contract on the stock.

(a) What are the futures price and initial value of the contract?

(b) Four months later, the price of the stock is $95 and the risk-free rate is still 2% per annum. What are the futures

price and the value for the short position in the futures contract?

(c) Suppose the futures market quote for this contract in four months is $96 and the arbitrage trading costs are $1.

Is there is an arbitrage opportunity? If yes, briefly describe the arbitrage trades and cash flows.

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