Question $1$

Suppose that you own a security currently worth $$500.$ You plan to sell it in two years. To hedge against a possible decline in price during the next two years, you enter a forward contract to sell the security in two years. The risk$-$free rate is $3\mathrm{.}5\%.$

a$)$ Calculate the forward price on this contract.

b$)$ Suppose the dealer offers to enter into a forward contrast at $$525.$ Explain in detail how you can earn an arbitrage profit.

c$)$ After one year, the security sells for $$505.$ Calculate the gain or loss to your position if you entered the forward contract for the price calculated in a$).$