Question

An analyst for Bloom Ltd, gathered the following information with regards to futures contract: *Current spot-market...

An analyst for Bloom Ltd, gathered the following information with regards to futures
contract:
*Current spot-market price of R60
* Risk-free interest rate of 8.87% per annum
*The six-month future contract is priced at R62.60


Question
Given that the actual futures price of the contract is R59, describe the strategy an
arbitrageur could follow

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Homework Answers

Answer #1

Given Current Spot Rate = 60

Interest Rate = 8.87%

Six Month Future Contract Price = 62.6

Actual Futures Price = 59

Since Actual Future Price is greater than Six month future contract price, we will be able to make arbitrage profit by taking long position in futures market and short position in Current spot market.

Particulars Amount
At T0
Short sell one unit of underlying asset(ULA) @S0 = 60 60
Invest 60 in bank deposit @8.87% for 6 months -60
Long one unit of Underlying asset(ULA) in 6 month furture contract -
Total 0
At T0.5
Liquidate Bank Deposit and receive 60*e^(0.0887*0.5)   62.7209
Close the furtures position by paying 59 and acquiring one unit of ULA -59
Return one unit of ULA because you did short sel of ULA -
Profit on arbitrage will be (62.7209-59) 3.7209
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