Suppose you can borrow and lend at the annual interest rate of 7% per annum. The IBM stock is trading at $200. It is not going to pay any dividend in one year. Use this information to answer the following three questions.
1.What is the fair forward price of a forward contract which calls for the delivery of 1 share of IBM stock at the end of one year?
2. If the actual forward price FA is $212, your arbitrage strategy is to_____.
3. At the end of one year, suppose IBM stock price is ST, then the cash flow spot(stock) market is _____, the cash flow in the forward contract is _____, and the arbitrage profit is _____.