You work at the arbitrage desk of a large insurance firm. Your job is to identify and exploit arbitrage opportunities. You notice the following quotes.

 

3 month KLIBOR = 6.2%

6 month KLIBOR = 7.5%

3 month KLIBOR futures       = 94.50

 

Proof that arbitrage is possible and outline the appropriate arbitrage strategy. Assuming you can invest/borrow up to RM5 million, determine the arbitrage profit if the 3 month KLIBOR is at 93.0% on futures maturity. 

Answer rating: 100% (QA)

Arbitrage is possible in this scenario because the futures price for 3 month KLIBOR is not consisten... View the full answer