The expected rate of return on the stock indexSis 12%.The continuously compounded risk-free rate of return is 5%.The continuously compounded dividend yield on the stock index is 2%.The current price ofSis 100.You are considering two different options to purchase this stock: 1) an outright purchase, and 2) a long forward contract with a maturity date 1 year from today.

a)Calculate the expected stock price one year from today. [3 Marks]

b)Calculate the expected profit on the long forward one year from today, assuming the forward is currently priced at the no-arbitrage level. [3 Marks]

c)Explain why the expected profit on the long forward (at maturity, which is one year from today) is different than the expected change in stock price (i.e. the expected price ofSone year from now minus the current price ofS).