Question

Assume the risk-free rate is constant at 2.5%, please find out the possible arbitrage opportunity given...

Assume the risk-free rate is constant at 2.5%, please find out the possible arbitrage opportunity given the following information.

                        3-month futures price: $100

                        6-month futures price: $105

Homework Answers

Answer #1

Risk free rate is constant @ 2.5%

therefore risk free rate from the end to 3 months to the end of 6 months = 2.5%

Therefore implied forward rate for 6 months = 100 x (1+2.50% x 3 /12) = $100.625

Therefore arbitrage is possible
Buy 3 month futures @ $100

Sell 6 month futures @ $105

Pay the above amount ($100) at the end of 3rd month by borrowing for 3 months

Therefore amount to be repaid after 6 months =  $100 x (1+2.50% x 3 /12) = $100.625

Amount receivable from sell of 6 month future = $105

Therefore arbitrage gains (received at the end of 6 months)= $105 - $100.625 = $ 4.375

Thumbs up please if satisfied. Thanks :)

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Given no arbitrage opportunities in the futures market, please estimate the 12-month futures price given the...
Given no arbitrage opportunities in the futures market, please estimate the 12-month futures price given the following information. 3-month futures price: $100              6-month futures price: $105
Please construct the arbitrage opportunity to capture risk-free profit when you see the price of a...
Please construct the arbitrage opportunity to capture risk-free profit when you see the price of a dually listed multinational firm stock is $100 on the New York Stock Exchange and $110 Japanese Yen on the Tokyo Stock Exchange. Assume that the exchange rate is such that 1 USD equals 105.6 Yen. And also explain what is likely to happen to prices as traders take advantage of this opportunity.
You are an analyst at a large hedge fund company. You are analyzing the arbitrage opportunity...
You are an analyst at a large hedge fund company. You are analyzing the arbitrage opportunity related to Spot and Futures party. Suppose that a six-month futures price on lean hog is 65 cents per pound and the spot price of lean hog is 62 cents. The risk-free rate of interest is 10% per annum. a. is there an arbitrage opportunity? b. if there is an arbitrage opportunity, then will you borrow money or lend money? c. What is the...
The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that...
The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that any period rates less than a year can be interpolated (i.e. if you invested for 6 months then you would receive 4% in the US). The spot quote is €0.80/$ while the 3-month forward quote is €0.7994/$. You can borrow either $1,000,000 or €800,000. According to IRP, is the forward quote correct? If not, what should it be? If the forward quote is not...
The current continuously compounded risk free interest rate is 4% and we observe today, in May,...
The current continuously compounded risk free interest rate is 4% and we observe today, in May, that the November six months futures price for gold is £1,200. The one year May futures price for gold is £1,020. Is there an arbitrage opportunity? Demonstrate how we can exploit this arbitrage opportunity (No need to calculate the profits).
Given the following three assets, determine whether an arbitrage opportunity exists according to the arbitrage pricing...
Given the following three assets, determine whether an arbitrage opportunity exists according to the arbitrage pricing theory. If so, please calculate the excess return of the arbitrage portfolio; if there is no arbitrage opportunity, please enter zero as your answer. (Assume the weight in A is standardized to 1 or -1 depending on the position) Answers must be entered with 2 decimal places and no dollar signs , e.g. 6 as 6.00; 32.346 as 32.35. Asset E(r) (%) Beta A...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270. a. Is there an arbitrage opportunity? (sample answer: yes; or no) b. If there is an arbitrage opportunity, then will you long futures or short futures? (sample answer: Long; or Short) c. What is the arbitrage profit...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270. a.        Is there an arbitrage opportunity? (sample answer: yes; or no) b.       If there is an arbitrage opportunity, then will you long futures or short futures? (sample answer: Long; or Short) c.        What is the arbitrage profit per share if...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270. a. Is there an arbitrage opportunity? (sample answer: yes; or no) b. If there is an arbitrage opportunity, then will you long futures or short futures? (sample answer: Long; or Short) c. What is the arbitrage profit...
What is the arbitrage opportunity when 6-month forward price is out of line with spot price...
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)?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT