One ounce of gold currently costs $1,200 and storing gold costs nothing. The interest rate is 2.5% per annum, compounded continuously. Blake believes the price of gold is going to go up and takes a long position in a one-year forward contract on gold in order to (hopefully) profit from this view.

(a) Verify that the fair delivery price is, in fact, $1,230.38.

(b) Four months from now the price of gold has risen to $1,500 per ounce, and Blake feels that now is the time to cash out. Explain how he can use a second forward contract

to lock in a risk-free profit of $294.83

(c) Consider the setting in (b), only now assume that Blake's friend convinced him that gold was going to rally and talked him out of limiting his loss. If the gold price on

the delivery date turns out to be $700, how much did Blake cost himself by listening to his friend?