C. An assumption is made that you own a security currently worth K500. You plan to sell it in two months. To hedge against a possible decline in price during the next two months, you enter into a forward contract to sell the security in two months. The risk - free is 3.5%.

a. Calculate the forward price on this contract. ( 2 Marks)

b. Suppose the dealer offers to enter into forward contract at K498. Indicate how you could earn an arbitrage profit. ( 2 Marks)

c. After one month, the security sells for K490. Calculate the gain or loss to your position. ( 6 Marks)