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A forward contract is available on a 10 year RSA bond. The bond has par value of R100 and pays a R5 semi-annual coupon (30 June and 31 December). As at 1 July 2021 the RSA bond spot price is R113. The risk free interest rate is 6% per annum (continuously compounded and assumed for all time periods). A one year forward contract as at 1 July 2021 is priced at R115.50
Required
1. Determine whether an arbitrage opportunity exists for the one year forward contract on the RSA bond. If so determine the risk free profit that could be earned (show all calculations and transactions).
2. Assume that on 1 July 2021 an investor buys one of the one year contracts at the quoted one-year forward price of R115.5. Assume that six months later, 1 January 2022, the spot price is R98, and the investor wants to determine the value of the contract. Calculate the value on 1 January 2022.
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