financial derivatives

5. A security is currently trading at $95. It pays a dividend of $3 in 2 months. No other payouts are expected in the next 6 months. a. If the term structure is flat at 12%, what should the forward price be for delivery of this security in 6 months? (Use continuous compounding.) b. If the actual forward price is $92, explain how an arbitrage may be created. Draw a table with a line item for each of your transactions to justify your answer. 6. You are interested in a 3-month forward contract on GBP. Suppose the spot exchange rate is $1.40/E, the 3 -month interest rate on USD is 5%, and the 3 -month interest rate on GBP is 5.5%. If the forward price is given to be $1.41/E, explain whether there is an arbitrage opportunity. If there is an arbitrage opportunity, explain how you could exploit it by drawing a transaction table to detail your strategy