Suppose you enter into a forward contract to buy a (non-dividend paying) stock in one year. Suppose that the spot price of the stock is £50 and the annual risk-free rate is 2%. Suppose that the forward price is £52. 

Propose a trading strategy that delivers positive returns without any risk or cost today. Now suppose that the forward price is £50.5.  What should be the forward price so that there are no arbitrage opportunities?

Answer rating: 100% (QA)

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