(30 points) Consider a forward contract on some asset A, with a delivery date of 1 year from now. Let t0 be the current date when the forward contract is entered. A risk-free bond, B, offers a rate of R per annum, continuous compounding. The current spot price of asset A is 0. a. (10 points) Let K be the forward price of the asset which is negotiated at t0. Show that K must be: K=0. Explain carefully and show how arbitrage can be achieved if K is not 0, and also explain how the prices will adjust to restore K to 0. Consider both cases where K>0 , and K<0. Show cash flows in both time periods. b. (8 points) Suppose the current spot price of asset A is 0. 1 year from now, asset A will have only two states, state 1 where the price of A is 0D, and state 2, where the price of A is 0U, 0