Suppose that the price on a futures contract on ABC stock that is expiring in two days is $100 and the price of a forward contract on ABC stock that is expiring in two days is $97.

a. Show how an arbitrageur could earn a certain profit if short-term interest rates were constant. Assume that the current and next-day rates are 6% (annual). What is the profit that is obtained?

b. What would be the market impact on the prices as a result of the arbitrageurs actions?

c. Comment on the conditions necessary for futures and forward prices to be equal.