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Question 3. Forward and Spot Prices [30%]

Assume that the underlying asset/stock is an investment asset. The information of the forward price and stock/spot price is provided below:

Forward price	F0	$330
Stock/Spot Price	S0	$325
Maturity date of Forward Contract (2 years)	T	2
Risk-free Rate	r	4%

Question 3 - Part A [10%]

By using the information above and applying the Cost-of-Carry Model, verify if there is an Arbitrage Opportunity.

[Show your answers, including any formula, steps/calculations, and discussions as clear as possible]

Question 3 - Part B [20%]

Construct and demonstrate the Arbitrage Strategy (i.e., Cash-and-Carry Strategy or Reverse Cash-and-Carry Strategy) based on the above information and your result in Part (A). In addition, compute the Arbitrage Profit of this arbitrage strategy.

Important instructions: the Arbitrage Strategy (i.e., Cash-and-Carry Strategy or Reverse Cash-and-Carry Strategy) should be complete and include all of the steps (of Cash-and-Carry Strategy or Reverse Cash-and-Carry Strategy) that clearly show how a portfolio of forward, stock, and risk-free lending/borrowing can produce risk-free arbitrage profit. In addition, the Arbitrage Profit should be computed and clearly shown in your answers.

[Show your answers, including any formula, steps/calculations, and discussions as clear as possible]

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