You decide to enter a one-year forward contract on a stock S with S(0) = $100 that pays $5 cash dividends in four and eight months. The continuous interest rate is r = 2%.

(a) (3pts) What is the forward price F (0, 1) of this contract?

Six months later, the price of the stock increased to $110. You decide to enter a second forward with the same maturity, i.e. a six-month forward contract.

(b) (3pts) What is the forward price F (1/2, 1) of your second contract? Four months later, the stock increased to $120. You want to get rid off your obligations in two

months and decide to sell your forward contracts. (c) (4pts) What is the value of your two forward contracts?

(d) (3pts) How much money did you invest in total? Did you take advantage of an arbitrage opportunity?