You are planning to buy 2,000 Telekom stocks 6 months from now. Today it is quoted at $4.20 per share. You wish to lock a price due to uncertainty. Today K&K, a trader in the broker firm agreed on a November forward contract price of $3.35. Telekom stock is due to pay an interim dividend this year. The first interim dividend of RM0.70 for June was paid in July and another special interim dividend of RM0.50 is due in September this year. The risk-free interest rate is 10% p.a. for all maturities.

a) Briefly explain how you would exploit this arbitrage opportunity. (10 marks)

b) Provide two main reasons a firm chooses to use futures rather than forward while hedging its risk.

(4 marks)