Question 1. Assume that the present value of a stock is 100 SEK. Assume that there will be a dividend of 1 SEK of the stock just before six months ahead. Assume that there exists a risk-free asset with an annual interest rate of 2%. Assume that there are no transaction costs. A) Explain shortly what it means by a six-month future contract of the stock? b) What should the arbitrage-free price of a six months future contract of the stock be? c) Explain with words why the forward price needs to have the suggested price.

c.b) Use the information below about the current price, exercise price and sketch the payoff at the date of expiration if you buy the call. (assume that the price of the call is 10 (it will not be the correct price according to the solution in C) Stock price 100 Exercise price 105 Call price 10

C.c) Determine the value of the following call using the Black-Scholes model. The stock currently sells for $100 and the standard deviation of the stocks return is 0.3. The call has an exercise price of $105 and has 8 months to go before expiration. The continuously compounded risk-free rate of interest is 2%. Show all the calculations step by step.