Assignment $1$

Consider a security that sells for $$1,000$ today. A forward contract on this security that

expires in one year is currently priced at $$1,100.$ The annual rate of intcrest is $6\mathrm{.}75$

percent. Assume that this is an off$-$market forward contract.

A$.$ Calculate the value of the forward contract today, $V_0(0,T).$

B$.$ Indicate whether payment is made by the long to the short or vice versa.

Assume that you own a security currently worth $$500.$ You plan to sell it in two

months. To hedge against a possible decline in price during the next two months, you

enter into a forward contract to sell the security in two months. The risk$-$free rate is

$3\mathrm{.}5$ percent.

A$.$ Calculate the forward price on this contract.

B$.$ Suppose the dealer offers to enter into a forward contract at $$498.$ Indicate how

you could earn an arbitrage protit.

C$.$ After one month, the security sells for $$490.$ Calculate the gain or loss to your

position.