how to calculate 1.5?

answer like 264.34,236.7,395.49 are not right :)

1.3. You enter into a forward contract to buy 100 shares of Volkswagen stock in 1 year for 120/share. The current price of one share is 126.25. You paid 971 for this contract. In 1 year, the price of the stock is 128. The risk free rate over the year was 5%, compounded continuously. a) What is the payoff of your forward contract? b) What is the profit of your forward contract? 1.4. Use values from the previous problem for this problem. In addition, assume that Volk- swagen pays no dividends. You decide to short sell 100 shares of Volkswagen stock. Before the sale, you are required to deposit 30% in a margin account earning the risk free rate and return the shares in 1 year. What is the rate of return on your investment (as a continuously compounded interest rate)? In case you are wondering, we are taking the money earned from the initial short sale and putting it under our mattress. 1.5. You enter into both arrangements from the previous problems. In addition, you take the money you earned from the short sale and deposit it into some account earning the risk free rate. (This arrangement is similar to reverse cash-and-carry). a) What is the profit of your arrangement? b) What is the rate of return of your arrangement (as a continuously compounded interest rate)? 1.3: The payoff is the easy part of the computation. You only need to compute a multiple of a difference: 100(128 120) = 800 The profit is a little more involved. We paid 971 for the forward contract. If we had invested that at the risk free rate, then we would have had 971e0.05-1 = 1020.78. As a result, the profit is negative: 800 1020.78 = -220.78 Notice that it wasn't necessary to know the the price of the shares today; however, the price today (and some dividend rate) was used by me to compute the price of the forward contract. 1.4: We must produce a margin of 30% of the original cost of the stock. That means we are investing 30% - 100 - 126.25 = 3787.5 in this short sale. Since there are no dividends, the short sale computation is simpler: 3787.5e3+1 = 3787.5e 20.05-1 + 100(126.25 128) = 3981.69 175 3787.5e3 = 3806.69 j=0.005