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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
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