Use 4 of Future Contract - detecting riskless arbitrage opportunities Steps: (1) Borrow money for the...

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Use 4 of Future Contract - detecting riskless arbitrage opportunities Steps: (1) Borrow money for the term of the contract at market interest rate (eg. Repo rate) (2) Buy the underlying commodity at the spot price (3) Sell the future contract at the current future price Then at expiration, (1) deliver the commodity and receive payment (Future contract price) (2) repay the loan plus interest. Example 9: A pure arbitrageur observes the following prices on Nov 15, 2015 Quoted price on a T-bill future contract that expires on Nov. 30, 2015 is 94.5 This contract delivers a 91-day T-bill at maturity. 106-day T-bill yield that expires on March 1, 2016 is equal to 5.53% (yield on discount) Repo rate for 15 days borrowing is an annualized 5.3% The nominal value for both the future contract and the 106-day T-bill is $10,000,000. Use 4 of Future Contract - detecting riskless arbitrage opportunities Steps: (1) Borrow money for the term of the contract at market interest rate (eg. Repo rate) (2) Buy the underlying commodity at the spot price (3) Sell the future contract at the current future price Then at expiration, (1) deliver the commodity and receive payment (Future contract price) (2) repay the loan plus interest. Example 9: A pure arbitrageur observes the following prices on Nov 15, 2015 Quoted price on a T-bill future contract that expires on Nov. 30, 2015 is 94.5 This contract delivers a 91-day T-bill at maturity. 106-day T-bill yield that expires on March 1, 2016 is equal to 5.53% (yield on discount) Repo rate for 15 days borrowing is an annualized 5.3% The nominal value for both the future contract and the 106-day T-bill is $10,000,000.