Suppose we observe the following:

Current spot or cash price = $100

Interest rate (both borrowing and lending) = 8% (continuous rate)

Dividend rate on asset = 2% (continuous rate)

No transaction costs and the asset can be both costlessly stored and sold short.

1. Suppose the price of one year forward contracts is $110. Explain how you could construct a riskless arbitrage and calculate the profits.

2. Suppose the price of one year forward contracts is $100. Explain how you could construct a riskless arbitrage and calculate the profits.

3. Given the results in 1 and 2, what can we say about what the price of one year forward contracts should be if the spot price is $100? Explain.