Stan Dardevian is a derivatives trader for Random House Investments. The firm seeks arbitrage opportunities in the forward and futures markets using the carry arbitrage model. Stan Dardevian considers an equity forward contract for Gizmos R US, Inc. (GRU). Information regarding GRU common shares and a GRU equity forward contract is presented in Exhibit 2.

EXHIBIT 2 + GRU has historically paid dividends every six months. + The price per share of GRU's common shares is $250. + The forward price per share for a nine-month GRU equity forward contract is $250.60913. + The risk-free rate is 0.325% (quoted on an annual compounding basis). + Assume annual compounding.

Stan Dardevian takes a short position in the GRU equity forward contract. His supervisor, Margie Noverro, asks, "Under which scenario would our position experience a loss?"

Three months after contract initiation, Stan Dardevian gathers information on GRU and the risk-free rate, which is presented in Exhibit 3.

EXHIBIT 3 + The price per share of GRU's common shares is $245. + The risk-free rate is 0.325% (quoted on an annual compounding basis). + GRU recently announced its regular semiannual dividend of $1.50 per share that will be paid exactly three months before contract expiration. + The market price of the GRU equity forward contract is equal to the no-arbitrage forward contract.

Based on Exhibits 2 and 3, and assuming annual compounding, the per share value of Dardevian's short position in the GRU forward contract three months after contract initiation is closest to:

		$1.6549.
		$5.1561.
		$6.6549.

Based on Exhibit 2, Stan Dardevian should find that an arbitrage opportunity relating to GRU shares is ...

		not available.
		available based on a strategy that involves buying GRU shares.
		available based on a strategy that involves selling short GRU shares.

The most appropriate response to Margie Noverro's question regarding the GRU forward contract is what:

1. a decrease in GRU's share price, all else equal.

2. an increase in the risk-free rate, all else equal

3. a decrease in the market price of the forward contract, all else equal.