Question 2 (8 marks) ZYX stock sells at $312 and is expected to pay dividends of $2 in 3 and 9 months respectively. The risk-free rate is 4% per annum continuously compounded for all maturities. We consider the 1-year futures contract on ZYX.

(a) What is the theoretical 1-year futures price? (2 marks)

(b) The 1-year futures market price is $324. Show that there is an arbitrage and how to benefit from it? Show all details. (4 marks)

(c) Based on the futures market price in part (b), what is the value of a short futures contract on ZYX 10 months from now if the futures price in 10 months is $326? (2 marks)