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Consider a 3-year forward contract on 50 underlying assets S. Each asset pays 71 in a years time and 63 in 2 years time. The spot price of one asset at time 0 is So = 3,205.1. The continuously compounded interest rate is r = 4% (fixed over the 3-year period). (a) Consider portfolio A which consists of 50 asset S. Fill out the table below with the cashflow generated by Portfolio A where it is assumed that any revenue is automatically invested in ZCBs that mature at the final time t = 3. Portfolio Time t=1 Time t= 2 Time t= 3 Time t=0 5050 A: (b) Construct a replicating portfolio -called portfolio B- (to portfolio A) using a forward contract underlying 50 assets S (and with forward delivery price K, unknown at this time) and suitable ZCBs. All investments of Portfolio B are made at time t=0. Write in the table below the evolution of the value of Portfolio B (you don't need to fill out columns t = 1 and t = 2) Portfolio Time t=0 Time t=1 Time t= 2 Time t=3 B: 0 50ST - K Explain why Portfolio B replicates portfolio A. (c) Make use of the Law of one price and the tables above to find the no-arbitrage forward price K of the forward contract. (see next page) Consider a 3-year forward contract on 50 underlying assets S. Each asset pays 71 in a years time and 63 in 2 years time. The spot price of one asset at time 0 is So = 3,205.1. The continuously compounded interest rate is r = 4% (fixed over the 3-year period). (a) Consider portfolio A which consists of 50 asset S. Fill out the table below with the cashflow generated by Portfolio A where it is assumed that any revenue is automatically invested in ZCBs that mature at the final time t = 3. Portfolio Time t=1 Time t= 2 Time t= 3 Time t=0 5050 A: (b) Construct a replicating portfolio -called portfolio B- (to portfolio A) using a forward contract underlying 50 assets S (and with forward delivery price K, unknown at this time) and suitable ZCBs. All investments of Portfolio B are made at time t=0. Write in the table below the evolution of the value of Portfolio B (you don't need to fill out columns t = 1 and t = 2) Portfolio Time t=0 Time t=1 Time t= 2 Time t=3 B: 0 50ST - K Explain why Portfolio B replicates portfolio A. (c) Make use of the Law of one price and the tables above to find the no-arbitrage forward price K of the forward contract. (see next page)

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