define the parameters on your own or use the following assumption for the parameters:

F = S*erT We learned in the class that when future price is deviated from the price determined from the above formula, an arbitrage opportunity will arise. You will use this case to illustrate if you can find an arbitrage opportunity in a real world.

 

 

Interest rate is 5%

Transaction costs for a trade on futures (selling or buying) is a flat fee of $25.

Transaction costs for a trade on spot (selling or buying) is a flat fee of $25.

Transaction costs for a trade on bonds (selling or buying) is a flat fee of $25.

Trading margin requirements: Futures 5% Bond 50% Spot 100% You may use 365 days a year to calculate interest.

To find a commodity spot price and initial margin requirement, you may Google search to find them. For example, for gold spot price, you may google "spot gold price."

Prepare your report in MS PowerPoint: You will prepare a report that includes an Introduction of your selection of the derivatives (You may choose any commodity asset or any financial instrument), explanation of any theory you applied, the data sources (please include a screen shot of the Futures quote from CME.com), and your summary conclusion. Include everything, Excel calculation, in a PowerPoint document.

To submit your report, login Blackboard, click Module 7, find the folder for "Project Submission."

Assume you have $1,000,000 trading credit to conduct the arbitrage.

Your report will be assessed by the following Assessment Matrix:

1. Case Introduction, Explanation, and Parameter Assumption: 40%

2. Arbitrage calculation in Excel: 30%

3. Summary of your arbitrage results:

(including arbitrage profit per contract, and total arbitrage profit) 30%

Total 100%