1. A trader owns a commodity as part of a long-term investment portfolio. The trader can buy the commodity spot for $920 per ounce and sell it spot for $918 per ounce (so, yes, here we need to consider the bid ask spread for the spot price). The commodity cost nothing to store. The trader can borrow funds at 4.5% per year and invest funds risk-free at 3.5% per year (and here we need to consider the bid-ask spread for the interest rate). Both interest rates are expressed with continuous compounding. Assume there is no bidask spread for forward prices and denote with F₀ the nine-month forward price. For what range of nine-month forward prices does the trader have no arbitrage opportunities?

a) F₀ < $942.42

b) F₀ > $960.25

c) $952.77 < F₀ < $960.25

d) $942.42 < F₀ < $951.58

e) None of the other answers

2. On March 15, Kevin Smith has observed that the futures contract on S&P200 with expiration on May 15, August 15 and November 15 settle at 7,406.668, 7314.156 and 7,278.179. respectively. The risk-free rate of interest is 1.5% per annum and the dividend yield on the spot index is 5% per annum (both rates are continuously compounded). Transaction costs are negligible. Which of the following statements is correct?

a) Kevin can short the May contract and long the November contract to exploit an arbitrage opportunity.

b) Kevin can long the May contract and short the August contract to exploit an arbitrage opportunity.

c) More than one of the other statements is correct.

d) Kevin can short the August contract and long the November contract to exploit an arbitrage opportunity.

e) None of the other statements is correct.