Question: A security is currently trading at $96. It will pay a coupon of $4 in three months. No other payouts are expected in the next

A security is currently trading at $96. It will pay a coupon of $4 in three months. No other

payouts are expected in the next six months.

(a) If the relevant interest rate is 10% p.a. with continuous compounding, what should be the fair forward price of this security for delivery in six months? (5 marks)

(b) If the market quoted six- month forward price of this security is $98, explain step-by-step how an arbitrage may be created. (5 marks)

	Cash Flows
Trade	Initial T₀	Interim T_t	Final T₁

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