1. Assets A and B have the same spot price of $100 today. Over the next year, asset A either increases to $120 with a probability of 99% or increases to $101 with a probability of 1%. Over the same time period, asset B either increases to $121 with a probability of 1% or decreases to $0 with a probability of 99%. The 1-year risk-free spot rate is 10% continuously compounding. Which of the following is true if neither asset is paying dividends within the next year?

   A. There is an arbitrage B. Asset As one-year forward price is greater than that of assetB. C. Asset As one-year forward pricei s less than that of assetB. D. Asset As one-year forward price is equal to that of asset B.

2. Suppose current stock price is $20 and the stock is not paying dividend. There is a one- year forward contract on the stock with forward price being $22. The effective annual interest rate is 5%, i.e., 5% compounded annually. Which of the following is correct?

   a. There is no arbitrage opportunity. b. There exists arbitrage opportunity. To make arbitrage profit, short forward, short sell stock, and lend money. c. There exists arbitrage opportunity. To make arbitrage profit, short forward, buy stock, and borrow money. d. There exists arbitrage opportunity. To make arbitrage profit, long forward, short sell stock, and lend money. e. There exists arbitrage opportunity. To make arbitrage profit, long forward, buy stock, and borrow money.