UK Can anyone help me to answer Q1.5(a)


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1.3You enter into a forward contract to buy 100 shares of Volkswagen stock in 1 year for 120/share. The current price of one share is 126.25. You paid 971 for this contract. In 1 year, the price of the stock is 128. The risk free rate over the year was 5%, compounded continuously.
a) What is the payoff of your forward contract?
b) What is the profit of your forward contract?

1.4Use values from the previous problem for this problem. In addition, assume that Volkswagen pays no dividends. You decide to short sell 100 shares of Volkswagen stock. You are required to deposit 30% in a margin account earning the risk free rate and return the shares in 1 year. What is the rate of return on your investment (as a continuously compounded interest rate)? In case you are wondering, we are taking the money earned from the initial short sale and putting it under our mattress.

1.5You enter into both arrangements from the previous problems. In addition, you take the money you earned from the short sale and deposit it into some account earning the risk free rate. (This arrangement is similar to reverse cash-and-carry).
a) What is the profit of your arrangement?
b) What is the rate of return of your arrangement (as a continuously compounded interest rate)?
 
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Ian

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Please note that if you are looking for assistance with an exam-style question, you must attempt the question yourself before asking for help. You can then state the answer you have so far and explain which aspect you need help with. Anyone posting exam-style questions expecting the answer to be given to them will have their posts removed. Repeat offenders will be banned from the forum.
 

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