Q2 (forward pricing, the basic case) Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free rate is 5%, and the dividend yield on the index is 0. (a) What is the no-arbitrage forward price for delivery in 9 months? (b) Suppose a customer wishes to enter into a short index forward position. If you take the opposite position, demonstrate how you would hedge your resulting long position using the index and borrowing or lending. (You can assume the size of the forward relative to the underlying is one for all questions hereafter that ask you to write down the arbitrage strategies.) You will: A. short-sell the index, lend cash B. short-sell the index, borrow cash C. long the index, borrow cash D. long the index, lend cash [Use the following table to fill in the hedging strategy to undertake. No need to input the table contents to Moodle submission link.] Strategy\\CF (c) Suppose you observe a 9-month forward price of 1130. What arbitrage would you undertake to have zero cash flow today, yet positive cash flow in 9 months? A. Cash and carry B. Reverse cash and carry (d) Suppose you observe a 9-month forward price of 1150, and you undertake the correct arbitrage strategy, what 1s your profit in 9 months? [Use the following table to fill in the arbitrage strategy to undertake. No need to input the table contents to Moodle submission link.]