1. Forward on Asset Paying Discrete Dividend Consider a 9-month forward contract on a corporate bond. The...

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1. Forward on Asset Paying Discrete Dividend

Consider a 9-month forward contract on a corporate bond. The current price of the corporate bond is $900, and it will pay $40 coupon in 4 months. The 4-month and 9-month risk-free rates are 3% and 4%, respectively. Suppose that the forward price is $860. Is there an arbitrage? If so, present the arbitrage strategy. Specifically, construct the arbitrage that results in positive cash flow today and zero cash flow afterwards.

2. Forward on Foreign Currency

The 2-year interest rates in Euro and the United States are 1.50% and 2.70% per annum, respectively, with continuous compounding. The spot exchange rate is USD 1.14 per EUR. The forward price for the 2-year contract is $1.20. Is there an arbitrage for US investors? If so, present the arbitrage table.

3. Valuation of Forward

Suppose that you currently hold a long position of a forward contract on a stock that you entered previously. The forward price on this contract is $80 and this contract will expire in two years. You want to close the position right now, earlier than the maturity, and the counterparty agrees to do so. To close now, how much do you need to pay to or receive from the counterparty? The current stock price is $80 and the risk-free rate is 3%.