Arshia Hershey, a newly hired bond trader, is eager to exploit what she perceives to be an inefficiency in futures market prices. Specifically, she observes the following information concerning prices in the spot market for bonds and for the bond futures contract maturing three months from now:
Spot price ................... $102.30
3-month futures contract price ........... $112.15
Income from the Treasury bond for 3 months ..... $ 2.20
Finance charge for 3 months ............. $ 1.10
a. Describe the arbitrage transaction that Arshia should undertake to take advantage of these market conditions.
b. Demonstrate the arbitrage profit that she will realize at the expiration date of the futures contract.
c. Does your answer to Part b depend of the price of the underlying bond at the maturity date of the futures contract? Explain why or why not.