A market maker in stock index forward contracts observes a 6-month forward price of 112 on the index. The index spot price is 110 and the continuously compounded dividend yield on the index is 2%.

The continuously compounded risk-free interest rate is 5%.

Describe actions the market maker could take to exploit an arbitrage opportunity and calculate the resulting profit (per index unit).

(A) Buy observed forward, sell synthetic forward, Profit = 0.34

(B) Buy observed forward, sell synthetic forward, Profit = 0.78

(C) Buy observed forward, sell synthetic forward, Profit = 1.35

(D) Sell observed forward, buy synthetic forward, Profit = 0.78

(E) Sell observed forward, buy synthetic forward, Profit = 0.34