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A2 A 9-months forward contract on a non-dividend paying stock is entered into when the...

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A2 A 9-months forward contract on a non-dividend paying stock is entered into when the stock price is 40 and the risk-free interest rate is 5%. (a) What are the forward price and the value of the forward contract at the initial time? [4] (b) Suppose that at the initial time the forward contract is being bought and sold in the market for 5, instead of being traded at the fair price. Outline a simple trading strategy to take advantage of the arbitrage opportunity, stating how much risk-free profit will be made per contract. [5]

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