Problem 1. Forward prices and value [25 marks] a) [5] Suppose there is a 16 months Forward on 1 share of non- dividend paying stock traded in the market. Current stock prices are $50 and the Forward price is $57. What is the interest rate (continuously compounded) implied by the given Forward price? b) [6] Suppose that actual interest rates are 7% per annum (continuously compounded as well). Find the Fair price of Forward contract and explain your arbitrage strategy. Demonstrate your payoffs on the strategy. c) [6] Demonstrate your arbitrage strategy if actual rates are 11%. d) [8] Suppose you ended up Shorting that Forward contract in (a). 3 months later Forwards on the same asset with the same maturity date are traded at a fair price. Spot prices are $53 and the risk-free rate is 8%. Find the value of your position