You are a financial advisor at Investo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on a futures contract with the following features:

Ø The futures contract will expire in 9 months.

Ø The underlying asset is a share with a price of R60.

Ø The share is a non-dividend paying stock.

Ø The risk-free interest rate per month is 0.90%.

Ø The intrinsic or fair value of the futures is estimated to be R65,04.

Ø Assume that the actual futures price available in the market is R64.

Required:

2.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy for both cases. (11 marks)

2.2. Discuss any two differences between futures and forwards contracts. (4 marks)

Answer rating: 100% (QA)

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