Question
Make an assumption that a security that you own is currently worth K800 and you plan to sell it in two months time. This is
Make an assumption that a security that you own is currently worth K800 and you plan to sell it in two months time. This is to create hedge against a possible decline in price during the next two months. A forward contract is negotiated to sell the security in two months at a risk-free rate of return of 4%.
a. Whats the forward price on this contract?
b. What if the dealer proposes to go into a forward contract at K698? How would you earn an arbitrage profit.
c. If a after one month, the security sells for k690. What would be the gain or loss to the position you took.
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