Ken is interested in shares in ANZ. Ken would like to enter a short forward position on 1 share in ANZ with counterparty Danny, to be executed in 6 months time. The current price for a share in ANZ is $40. The risk-free rate of return is 3% p.a. compounding continuously, and anyone on the market is free to lend or borrow at this rate.

For this question, ignore any transaction fees, taxes, and other expenses.

a) Once Ken and Danny enter into the forward contract described above, has Ken agreed to buy a share, or sell a share, in 6 months time?

b) Calculate the arbitrage-free forward price that Ken and Danny should use in their forward contract using the information provided above.

c) Suppose that Ken and Danny have agreed to the forward price you calculated in part b), and 2 months have passed. The price for a share in ANZ is now $42, and the riskfree rate of return is now 5% p.a. compounding continuously. What is the value of this contract from Kens perspective?

d) Given your results in part c), what is the value of the forward contract from Dannys perspective?

e) Ken, thinking back to when he first entered the contract with Danny, remembered a particular trader named Mac. Mac was willing to write forward contracts, long or short, to be executed in 6 months, for a forward price of $40.90. Using your result from part b), describe how Ken could have traded with Mac to make an arbitrage profit.