Question: On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that fed founds futures constricts trades

On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that fed founds futures constricts trades at a 25 basis point rate under one-month LIBOR at the start of the of the delivery month. The December fed founds futures is quoted at 94.75.
Assuming no basis risk between fed founds and one-month LIBOR at the start of the delivery month, identify whether an arbitrage opportunity is available. Contract size is $5,000,000. Be sure to illustrate the arbitrage strategy for one contract. To show the dollar arbitrage, assume that the one-month LIBOR rate on December 1 was 7 percent?

Step by Step Solution

★★★★★

3.33 Rating (156 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

The arbitrage can be illustrated with the following table The key insight is that the payoff require... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

768-B-F-F-M (7206).docx

120 KBs Word File

Students Have Also Explored These Related Finance Questions!

Powder Mountain (PM) ski resort is currently using a Skidata barcode ticketing system. PM purchased the system three years ago for $1 million. The system includes barcode scanners and point-of-sale...

A bank can borrow or lend at LIBOR. The two-month LIBOR rate is 0.28% per annum with continuous compounding. Assuming that interest rates cannot be negative, what is the arbitrage opportunity if the...

OIS rates have been estimated as 3.4% for all maturities. The three-month LIBOR rate is 3.5%. For a six-month swap where payments are exchanged every three months the swap rate is 3.6%. All rates are...

Repeat the previous problem, but now assume that the one-month LIBOR rate on December 1 was 5.5 percent?

On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that fed funds futures contracts trades at a 25 basis point rate under one-month LIBOR at...

1. On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that Fed funds futures contracts trades at a 25 basis point rate under one-month LIBOR at...

On November 1, the one-month T-bill rate is 4.0% and the two-month T-bill rate is 5.0%. Assume that fed funds futures contracts trade at a 25 basis point rate under one- month T-bill rate at the...

1. On February 4 of a particualr year, the spot rate for U.S. Dollar ($) expressed in euros was $07873/euro. The U.S. interest rate (Compounded semiannually) was 5.36 percent, whereas the euro...

1. On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that fed funds futures contracts trade at a 25 basis point rate under one-month LIBOR at...

On November 1, the one-month LIBOR rate is 4.50 percent and the two-month LIBOR rate is 5.00 percent. The November Fed funds futures is quoted at 94.50. The contract size is $5,000,000. Discuss...

A company makes DVD players and incurs a variety of different costs. Place a check in the appropriate column if the cost is a product cost or a period cost. Further, classify each product cost as...

Refer to Figure, the level 0 DFD of Suprinas order entry system. Use Microsoft Visio or other diagraming software. a. Construct a diagram 1 that explodes process 1.0, Capture customer order, down to...

9 - Victoria i s choosing between a standard Honda Civic for $ 2 0 , 0 0 0 o r a hybrid Civic for $ 2 5 , 0 0 0 . She calculates her annual cost o f 6 5 ownership including payments but not including...

Garfield Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity...

Four Finger Appliance Company manufactures small kitchen appliances. The product line consists of blenders and toaster ovens. Four Finger Appliance presently uses the multiple production department...

List and briefly explain each of the Auditing Standards Boards management assertions. List at least one key question that auditors must answer with evidence related to each management assertion.

The city museum will have a Picasso exhibit on loan for three years. As part of the conditions of the loan, a specialized alarm and security system must be installed. High Security Company will...

Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying and requires an interest rate implicit in the...

If there are multiple critical paths on the project, which of the following must also be true? A. Only one path will ultimately emerge as the true critical path. B. The schedule risk will be higher...

Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be...

Which of the following statements is most correct? a. If a firms expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and...

AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEIs times-interest-earned (TIE) ratio?

Draw the datapath and corresponding registers / counters and ALU as shown in Figure 1 . You are more than welcome to use your pervious ALU design ( Lab 2 ) in your circuit.

2 punts QUESTION Mike's Place has total assets of $152,080, a debt equity ratio of 62, and net income of $14,342 What is the return on equity! For the toolbar, press ALT F10 (PC) OR ALT FF10Mac) 1...

5. An appraisal specialist has applied multiple regression analysis to prepare a mass appraisal model for this Edmonton data. Four variations of this model have been prepared, all using PRICE as the...