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An investor borrows money to buy $130 of stock XYZ and will repay it in a year with an annual interest rate of 5% and

An investor borrows money to buy $130 of stock XYZ and will repay it in a year with an annual interest rate of 5% and sells a forward contract of $142. Assume that the price of stock XYZ in a year is $120.

a. Compute net cash flow at time T (in a year).

b. Suppose that you want to get arbitrage profit at time 0. How much you need to borrow for your arbitrage profit?

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