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Find the replicating portfolio for the forward contract

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(a) Find the replicating portfolio for the forward contract on a stock, F(t), when the spot price of the share is $20, the continuously compounded interest rate is .12, and the continuously compounded dividend rate is .04. The time interval is one year. Explain the replication process carefully.

(b) Show the arbitrage profit when the forward rate, F(t), equals $15 in the market. Explain each step carefully.

Reference no: EM132951889

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