Question (2500 words)

Thetask is toexplore theconcept ofarbitrage inrelation to pricing. Theoretical pricingandthe actual listing ofprices inmarkets are sometimes atodds with oneanotherandthis can lead toinefficiencies inprices and create arbitrage trading opportunities. Your task isto describe and explain the concept ofarbitrage andshownumerically how arbitrage opportunities can occur in themarkets. You are required to observe historical market prices (in2020) and seeifthey are efficient compared to whatthe theoretical valueshouldbe.

Thisassignment isessay basedand isdesigned to show your understanding ofthisfundamental concept infinance. Yourfocus should beonarbitrage opportunitiescreated inoneof the followingmarkets;

• Creditderivatives

Or

• Forwards/futures

(Note: chooseCreditderivatives market)

The key focus is on the following areas;

1. Discuss theconcept ofarbitrage and howitcan be usedinyour chosenmarket. [Marked at50%].

guidance:

1. Clearly define the concept of arbitrage. Is it always possible to make arbitrage, if so, how? if no than what makes it difficult to do so.

Explain different examples of Arbitrage which could be applicable to your chosen market (examples: credit arbitrage, triangular arbitrage, covered Interest arbitrage, locational arbitrage). For the sake of consistency 4 is a good benchmark number.

2. Numerical Illustration of Arbitrage

Use hypothetical (numerical illustration) to show when arbitrage could be made. Make sure you use both cases of long and short a contract.

2. Provide some analysisto demonstratefurther your understanding ofarbitrage and howsuch a strategy could beconstructed.

[Marked at 40%]

guidance: You would need to use Arbitrage in a Forward Market using real-life data.

Here you would need to have data of prices and Forwards/CDS for a specific year. In the brief it mentions 2020. But happy if you use a different year.

Based on the data you explain how the arbitrage could be a possibility. You then analyse the results to state how the arbitrage was possible. For example, did you short the asset, did you borrow to buy the asset, what interest rate have you used, any consideration for transaction costs, did you apply any markup on the risk-free rate.

You then evaluate the strategy you have used. Was it completely risk free?, what are the limitations (if any)?. What are the assumptions you have made (if Any) and why?

Please show me detail for this part, use this website to gathering data: https://www.worldgovernmentbonds.com/sovereign-cds/

3. Your assignmentshouldbepresented inessayformat. Thispiece ofwork istheoretical and wouldsuitethis approach thebest. These marks are awardedfor the writingqualityofyourpiece.

[Marked at 10%]