Problem 1.1. Consider a one year forward contract written on a dividend paying stock. The stock currently trading at $100 (stock price), the continuously paid dividend rate is 2% and continuously compounded risk free interest rate is 5%. 1. Calculate the no arbitrage price of one year forward contract. 2. Write the payoff and profit functions for this forward contract. 3. Graph payoff us stock price and profit us stock price for this foruard contract. 4. Explain what it meant by "Arbitrage profit (opportunities)" in forward contract premises 5. Suppose you observe the forward contract is selling at $110. Explain your strategy of making arbitrage profit 6. Suppose you observe the forward contract is selling at $100. Explain your strategy of making arbitrage profit 7. Explain how forward contracts differ from futures contracts Problem 1.1. Consider a one year forward contract written on a dividend paying stock. The stock currently trading at $100 (stock price), the continuously paid dividend rate is 2% and continuously compounded risk free interest rate is 5%. 1. Calculate the no arbitrage price of one year forward contract. 2. Write the payoff and profit functions for this forward contract. 3. Graph payoff vs stock price and profit us stock price for this forward contract. 4. Explain what it meant by "Arbitrage profit (opportunities)" in forward contract premises 5. Suppose you observe the forward contract is selling at $110. Explain your strategy of making arbitrage profit. 6. Suppose you observe the forward contract is selling at $100. Explain your strategy of making arbitrage profit 7. Explain how forward contracts differ from futures contracts