What is the arbitrage opportunity when 6-month forward price is out of line with spot price for asset providing no income (asset price =$50; forward price=$55; interest rate=6%; maturity of forward contract =6 months)?
| Transaction of same assets between different markets at different price is called arbitrage. | ||
| Spot Price | $50.00 | |
| Forward Price | $55.00 | |
| Interest Rate | 6% | |
| maturity of forward Contract | 6 months | |
| Assumption- it is assumed that interest rate given is annual. | ||
| Amount of interest to be paid | = | Spot price X Interest Rate X period in months /12 |
| = | 50 X 6% X 6/12 | |
| = | $1.50 | |
| Total Amount to be paid | = | Amount borrowed + interest |
| = | 50+1.5 | |
| = | $51.50 | |
| Vale of Forward Contract | = | $55.00 |
| Gain | = | Value of forward contract- Total amount to ve paid |
| = | 55-51.5 | |
| = | $3.50 | |
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