QUESTION 3 Consider a long forward contract to purchase a coupon-bearing bond whose current price is £650. We will suppo

[answerhappygod]

QUESTION 3
Consider a long forward contract to purchase a coupon-bearing
bond whose current price is £650. We will suppose that the forward
contract matures in 9 months, and a coupon payment of £28 is
expected after 4 months. We suppose that the 4-month and 9-month
risk-free interest rates (continuously compounded) are 3% and 4%
per annum.
Required:
a)
Calculate the forward price.
(8 marks)
b) Is there an
arbitrage opportunity if the forward price is relatively low at
£600? List the possible arbitrage actions for
i)
Now;
ii)
In 4 months; and
iii)
In 9 months.
(15 marks)
c)
Critically evaluate why the futures prices of consumption assets
are difficult to calculate.
(7 marks)