Question

The futures contract for settlement in 4 months is trading at F0 = $6.35 and the...

The futures contract for settlement in 4 months is trading at F0 = $6.35 and the cash market is trading at S0 = $6.28. The 4-month interest rate on a continuously compounded basis is 2 percent. A trader looks at the above silver prices and takes advantage of the mis-pricing. What are the transactions and how much profit does the trader make?

Buy now at So with borrowed money and enter a short forward contract at Fo. At time T deliver the underlying, receive F0 and pay back the loan plus interest. Net profit is: $0.335

Buy now at So with borrowed money and enter a short forward contract at Fo. At time T deliver the underlying, receive F0 and pay back the loan plus interest. Net profit is: $0.0280

Sell short So and invest proceeds at r and enter long a forward contract at Fo; at time T receive the underlying for F0, cover the short and also collect the principal plus interest from the bank. Net profit is:0.322
Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The futures contract for settlement in 4 months is trading at F0 = $6.35 and the...
The futures contract for settlement in 4 months is trading at F0 = $6.35 and the cash market is trading at S1 = $6.42. The 4-month interest rate on a continuously compounded basis is 2 percent. What is the arbitrage trade that is available, the transactions and the arbitrage profit? Buy now at S1 with borrowed money and enter a short forward contract at Fo. At time T deliver the underlying, receive F0 and pay back the loan plus interest....
QUESTION 2 You are a French investor with access to €500,000.00. You are provided with the...
QUESTION 2 You are a French investor with access to €500,000.00. You are provided with the following quotations from a bank: Exchange rate Borrowing interest rate Investment interest rate Spot rate (€/$ $1.4300 = €1.00 € = 4.2% per annum € = 4.1% per annum F360(€/$) $1.4184 = €1.00 $ = 3.65% per annum $ = 3.5% per annum You have conducted your own calculations based on the above information and you identified an arbitrage opportunity. Therefore, you have now...
Consider a single-stock futures contract on Best Buy Co. The company will pay a quarterly dividend...
Consider a single-stock futures contract on Best Buy Co. The company will pay a quarterly dividend of $0.17 per share prior to expiration of the futures contract. Consider the following scenario. The stock goes ex-dividend in one month; for convenience, we will assume that the dividend is paid at that time. Assume that this dividend is the only one prior to expiration of the futures contract. Annualized, continuously compounded risk-free interest rates: r1 = 3% for one month, and r2...
Explain how each trader would set up a strategy to carry out their intended purpose. Be...
Explain how each trader would set up a strategy to carry out their intended purpose. Be as specific as possible in each case, by providing details about the strategy: the position (whether long or short), the size of the exposure (notional amount), the number of contracts involved (if more than one), the expiration date of the contracts, etc. In each case, explain whether the trader will realize a profit or a loss if the underlying asset/variable increases by 10%. An...
A. An investor enters into a futures contract covering 100 ozs. of gold. At the time...
A. An investor enters into a futures contract covering 100 ozs. of gold. At the time the underlying price of gold is $1,525 per ounce. At the end of the year the investor is still holding the contract and the underlying price of gold under the contract is $1,450 per ounce. On March 1, of the following year, the investor takes delivery of 100 ozs. of gold under the contract when the price of gold is $1,400 per ounce. What...
The premium paid on an option contract (either a put or a call) represents the compensation...
The premium paid on an option contract (either a put or a call) represents the compensation the buyer of the option receives from the seller (writer) of the option for the ability to use the option if it becomes profitable. If the buyer of the option does not use the option before expiration, this premium must be returned back to the seller (writer) at the time the option expires. True False 2 points    QUESTION 3 On the day of...
Lori Jacobson is a foreign exchange trader at Deutsche Bank in Singapore. For her next trade,...
Lori Jacobson is a foreign exchange trader at Deutsche Bank in Singapore. For her next trade, she decides to embark in the famous “carry trade”, where you short sell a low-yield currency and use the proceeds to buy and hold a high-yield currency for a certain period of time. On July 1st, she borrows 100 Million Japanese Yen (JPY) for 1 month, and immediately sells them to buy New Zealand Dollars (NZD) on the foreign exchange market. She deposits the...
62. As noted in the article about trading pits, a. futures pits in Chicago were closing...
62. As noted in the article about trading pits, a. futures pits in Chicago were closing down. b. futures pits in New York were closing down. c. floor trading on the New York Stock Exchange were closing down. d. All of the above. e. Only A and B of the above. 63. Which of the following are among the lessons that we can reasonably draw from the collapse of Continental Illinois? a. The aggressive pursuit of commercial loans was doomed...
4. Covered versus uncovered interest arbitrage On May 31, Kate, an American investor, decided to buy...
4. Covered versus uncovered interest arbitrage On May 31, Kate, an American investor, decided to buy three-month Treasury bills. She found that the per-annum interest rate on three-month Treasury bills is 7.00% in New York and 9.00% in Tokyo, Japan. Based on this information and assuming that tax costs and other transaction costs are negligible in the two countries, it is in Kate’s best interest to purchase three-month Treasury bills in [ New York / Tokyo]   , because it allows...
2. What is the duration of a $1,000, 8% coupon bond with 4 years to maturity....
2. What is the duration of a $1,000, 8% coupon bond with 4 years to maturity. Assume that all the market interest rates are 10%. * A. 4 years B. 3.56 years C. 3 years D. 3.75 years 3. If you expect the inflation rate to be 17 percent next year and a one-year bond has a yield to maturity of 8 percent, then the real interest rate on this bond is: A. 10% B. 25% C. 9% D. 8%...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT