You are given: The current stock price is $85. The continuous rate of interest is 5%, = 0.5, and the annualizes forward premium is 2%.

(a) Find the prepaid forward price.

(b) Tom observes a 6-month forward price of $86.5 in the market. He constructs a portfolio by taking a short position in a forward contract to sell one unit of the stock and buying one unit of the stock. Determine whether Toms portfolio is an arbitrage portfolio or not.