2. The current price of silver is $21.76 per ounce. Assume that the storage cost is zero. The 3-month interest rate is 1.51% per annum (with continuous compounding). A CME silver futures contract is current trading at $21.6 (per ounce) will mature in three months. The size of the contract is 5,000 ounces. Ignoring bid-ask spread and transaction costs, identify the arbitrage opportunity and show how you can capture it (and have net cash inflow today).

a) Determine the fair 3-month futures price.

b) Is the futures overpriced or underpriced relative to its fair value?

c) Select the related transactions of arbitrage (Trade just one contract) (3 marks) (multiple selections are allowed)

Select one or more:

a.Buy 5,000 ounces of Silver @ spot price $21.76

b.Sell silver future @ $21.6

c.Deposit $108,800 in bank for 3 months and collect interest and principle of $109,211.50 at the end of the period

d.Borrow $108,800 for 3 months and repay $109,211.50 after 3 months

e.Sell 5,000 ounces of Silver @ spot price $21.76

f.Buy silver future @ $21.6

d) how much arbitrage profit can you lock in per future contract? (ignore transaction cost)