• The first column is the delivery month (202501 meaning January, 2025 (etc.); the second column is a forward price for the Henry Hub natural gas futures (HH) price; the third column is the forward price for delivery at the Dutch TTF natural gas price; the last column is a discount factor. Assume you can trade forwards for each of the delivery months at each of the locations at the prices quoted above.
• You contact a market maker who is currently quoting a calendar 2024 TTF-HH basis swap at a bid of $6.45 and an offer of $6.55. Each month January 2025-December 2025 this swap pays the difference between the TTF futures price at expiration and the Henry Hub futures price at expiration, minus the contractually agreed upon basis. For instance, if you buy the swap, the January TTF futures settles at $10.00, the Henry Hub price is $2, your cash flow is 10-2-6.55=$1.45MMBTU. If you had sold the swap, your cash flow is 2-10+6.45=-$1.55/MMBTU.
• Identify an arbitrage opportunity. To exploit this opportunity, should you buy the basis swap from the market maker, or sell it to him? To execute the arbitrage, what should you do in the Henry Hub NG futures market (buy or sell?) What should you do in the TTF forward market (buy or sell?). If you trade 30,000 MMBTU/month, how much money will you make at the market maker's expense?

	NG	TTF	DF
202501	3.727	10.571	0.9554
202502	3.551	10.606	0.951
202503	3.2	10.439	0.9467
202504	3.008	9.928	0.9426
202505	3.07	9.762	0.9385
202506	3.241	9.711	0.9346
202507	3.417	9.784	0.9308
202508	3.459	9.821	0.9272
202509	3.418	9.893	0.9237
202510	3.467	9.938	0.9203
202511	3.787	10.441	0.917
202512	4.202	10.811	0.9138

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Answer rating: 100% (QA)

There is an arbitrage opportunity here by exploiting the mispricing of the basis swap To execute t... View the full answer