Suppose you observe the following yields on T-bills and T-bill futures contracts on January 5, 1991:
Yield (%)
March futures contract on a 90 day T-bill (futures contract matures...........12.5
in 77 days on March 22)
167-day T-bill..........................................................................10.0
77-day T-bill.............................................................................6.0
(a) What arbitrage position should you undertake in order to make a certain profit with no risk and no net investment?
(b) What effect does the trend in spot prices have on the variance of prices for May contracts sold in February?