Question: A 1-year forward contract is issued on a share that has a current price of 12. A dividend of 1.50 per share is expected in

A 1-year forward contract is issued on a share that has a current price of 12. A dividend of 1.50 per share is expected in 8 months' time. Assume that the risk-free force of interest on deposits and borrowings from a bank account is 6% per annum.

(a) Calculate, correct to 4 decimal places, the no-arbitrage forward price of this contract

(b) Suppose the forward price of the contract is 11.50 in the market. Using only the share, the bank account and the forward contract, detail a strategy that gives a risk-free profit and hence calculate the amount of profit made.

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