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a Arbitrage is a key concept in financial mathematics. In this project, you are expected to consider some financial trading opportunities and identify, from the
a Arbitrage is a key concept in financial mathematics. In this project, you are expected to consider some financial trading opportunities and identify, from the given data set, a mispricing that can lead in turn to an arbitrage opportunity. Then you will have to report a corresponding arbitrage strategy for returning a risk-free profit and estimate the magnitude for the expected profit, both in written and in oral form. 3 Data A trader has access to the following four investment opportunities. One of them features a significant misprice that needs to be identified. Once identified, an arbitrage strategy can be devised to make a risk-free profit (see below for further guidance). The trader also has access to bonds at the UK market interest rate at 0.67%. Opportunity 3: Futures for commodities with storage costs The following financial data for trading in a variety of commodities was available on 1 January 2021. The fair strike price for the futures contracts is given for delivery of the commodity on 1 September 2021. All prices are given in GBP (pounds) per ounce. Storage costs are given per ounce for four months of storage and should be paid in advance. Spot price Storage cost per ounce Futures Gold 1081.98 8 1102.87 Iridium 1161.39 6 1178.63 Palladium 1082.14 5 1097.02
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