Question: A U.S. Treasury bond with a 20 year maturity is deliverable for a futures contract that settles in 6 months. The coupon rate on the

A U.S. Treasury bond with a 20 year maturity is deliverable for a futures contract that settles in 6 months. The coupon rate on the bond is 10% and the bond is selling at par ($100). The borrowing/lending rate is 4%.

a) What price for the futures contract associated with the bond above above eliminates arbitrage opportunities?

b) Suppose the futures price on this bond is 95. Design a strategy that allows you to earn arbitrage profits.

Explain how arbitrage results in the correct equilibrium price for the futures contract.

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