Consider a two year forward contract on a coupon bond. The forward price is $900 and the coupon bond price is $1100. Coupon payments of $100 are in 6 and 18 months time. Risk free rates are continuously compounded at 3.2% p.a. (6 months), 3.75% p.a. (12 months), 4% p.a. (18 months) and 4.2% p.a. (2 years). Which of the following statements is true to 2 decimal places?

1. An arbitrageur could long the forward, short the spot and make a profit of $45.98 on close out.
2. An arbitrageur could long the forward, short the spot and make a profit of $86.56 on close out.
3. An arbitrageur could long the forward, short the spot and make a profit of $87.81 on close out.
4. An arbitrageur could long the forward, short the spot and make a profit of $86.93 on close out.
5. None of the above

Group of answer choices

E

C

B

A

D