Question 6 [13 marks] Peter is planning to purchase a 180-day forward contract on 1,000 units of MQ company shares. The current share price of MQ company is $25 per share. Assume that Petter can borrow or lend at 3.5% p.a. simple interest. a. [4 marks] By using two carefully labelled cash flow diagrams in your answer setting out the cash flows associated with the forward contract and the repli- cating portfolio. Base your answer on the arbitrage pricing principle, and calculate the fair forward price to buy 1,000 units of MQ company shares at the end of 180 days. Round your answer to three decimal places. b. [4 marks] Suppose that the forward price for a forward contract on 1,000 units of MQ company shares, to be delivered at the end of 180 days, is $25,000. List and explain all the steps that Peter needs to undertake in order to make an arbitrage profit from this forward contract. Make sure you outline all that needs to happen on all relevant dates, as well as today. Round your answer to three decimal places. c. [4 marks] Suppose that the forward price for a forward contract on 1,000 units of MQ company shares, to be delivered at the end of 180 days, is $26,000. List and explain all the steps that Peter needs to undertake in order to make an arbitrage profit from this forward contract. Make sure you outline all that needs to happen on all relevant dates, as well as today. Round your answer to three decimal places. d. [1 mark] Do we expect an increase on the fair forward price to buy 1,000 units of MQ company shares at the end of 180 days, if there is a transaction cost charged when we are purchasing MQ shares? The cost is $50 which is a flat charge for any purchase volume. Question 6 [13 marks] Peter is planning to purchase a 180-day forward contract on 1,000 units of MQ company shares. The current share price of MQ company is $25 per share. Assume that Petter can borrow or lend at 3.5% p.a. simple interest. a. [4 marks] By using two carefully labelled cash flow diagrams in your answer setting out the cash flows associated with the forward contract and the repli- cating portfolio. Base your answer on the arbitrage pricing principle, and calculate the fair forward price to buy 1,000 units of MQ company shares at the end of 180 days. Round your answer to three decimal places. b. [4 marks] Suppose that the forward price for a forward contract on 1,000 units of MQ company shares, to be delivered at the end of 180 days, is $25,000. List and explain all the steps that Peter needs to undertake in order to make an arbitrage profit from this forward contract. Make sure you outline all that needs to happen on all relevant dates, as well as today. Round your answer to three decimal places. c. [4 marks] Suppose that the forward price for a forward contract on 1,000 units of MQ company shares, to be delivered at the end of 180 days, is $26,000. List and explain all the steps that Peter needs to undertake in order to make an arbitrage profit from this forward contract. Make sure you outline all that needs to happen on all relevant dates, as well as today. Round your answer to three decimal places. d. [1 mark] Do we expect an increase on the fair forward price to buy 1,000 units of MQ company shares at the end of 180 days, if there is a transaction cost charged when we are purchasing MQ shares? The cost is $50 which is a flat charge for any purchase volume
